Year after year, traders are discovering new ways to make money and invest in financial markets with new options and trading instruments. Today, non-deliverable forwards have emerged as one of the safest ways to trade and make income.
NDFs are unique forward trading options that mitigate several market-associated risks, like liquidity and volatility. Traders are increasingly considering NDFs in building an investment portfolio. Let’s discover how non-deliverable forwards work and what makes them unique.
What Are Non-Deliverable Forwards?
After years of being limited to a few market participants, NDFs have grown in popularity. These are forward contracts between two sides who agree to trade a security on a certain date at an agreed price. The NDF contract may concern any asset class, such as Forex, stocks, bonds and cryptos.
The NDF contract states the terms and conditions of both sides, such as the traded product, the day of execution and the price as agreed upon.
However, during the execution date, traders do not exchange the ownership of the subject product, but they earn from netting the price difference between the contract and transaction days.
NDFs differ from usual forwards, or deliverable forward contracts, which require transferring the principal ownership, while NDFs are only concerned with the price difference.
Previously, only a limited number of traders could benefit from NDF trading because liquidity and trading volume were low and accessing the market was a bit challenging. However, this segment has developed, and its trading volume exceeds $200 billion in value.
How NDFs Mitigate Trading Risks?
NDF trading allows both parties to avoid unexpected price fluctuations and changes in supply patterns. For example, in a conventional forwards contract, the subject instrument ownership must be transferred, but some delays may happen if liquidity levels suddenly change.
The market uncertainty can be avoided with an NDF contract, which does not require ownership and transfer of the asset. The trader gains if the NDF is a “buy” contract and the underlying product is rising in value.
NDF contracts may include any financial market. However, trading Forex and cryptocurrencies is a popular way to enter an NDF contract due to the wide range of available products and high liquidity.
Final Thoughts
Non-deliverable forwards are trading contracts that entail buying or selling a specific tradable asset(s) on a specific day at a given price. NDFs have become popular in the Forex and crypto markets, utilising the high liquidity and wide range of available currencies.
However, neither party transfers the product ownership. Instead, they benefit from netting the price difference between contract and transaction day.