IF-NDF market

• The NDF markets have generally evolved for currencies with foreign exchange convertibility restrictions, particularly in the emerging Asian economies, viz., Taiwan, Korea, Indonesia, India, China, Philippines, etc., With controls imposed by local financial regulators and consequently the non-existence of a natural forward market for non-domestic players, private companies and investors investing in these economies look for alternative avenues to hedge their exposure to such currencies. NDF market is an offshore market to trade and hedge in currencies of countries wherein there is no full convertibility (both capital account and Current Account). Few of the NDF market traded currencies are Indian Rupee, Chinese Yuan, Philippine Peso, Taiwan Dollar, and Korean Won. NDFs are distinct from deliverable forwards as the NDF s trade outside the countries of the corresponding currencies. NDF is a Non-Deliverable Forward contract which is settled in cash and only in US Dollars. The difference between the Spot rate and the outright NDF rate is arrived on an agreed notional amount and settled between the two counterparties. Trading in the NDF market generally takes place in offshore centres.
• In this market, no exchange takes place of the two currencies’ principal sums; the only cash flow is the movement of the difference between the NDF rate and the prevailing spot market rate and this amount is settled on the settlement date in a convertible currency, generally in US dollars, in an offshore financial centre. The other currency, usually an emerging market currency with capital controls, is non-deliverable. In this particular respect, of course, NDFs are similar to commodities futures market where commodities, like wheat or corn, are traded in organized futures markets and positions are later settled in dollars, wheat or corn being nondeliverable. The NDF prices are generally determined by the perceived probability of changes in foreign exchange regime, speculative positioning, conditions in local onshore interest rate markets, the relationship between the offshore and onshore currency forward markets and central bank policies.
• NDFs are primarily over-the-counter, rather than exchangetraded products, thus making it difficult to gauge the volume of  contracts traded, who trades the contracts, and where they are traded. At the international level, New York tends to dominate trading in Latin American NDFs, Singapore (and to a lesser extent Hong Kong) dominate trading in non- Japan Asian NDFs, while London spans these markets. The INR NDF is largely concentrated in Singapore and Hong Kong, with small volumes being traded in the Middle East (Dubai and Bahrain) as well