Non-deliverable forwards in plain words

[Shadow Trader]

Some currencies can't be freely delivered offshore because of capital controls. To trade views on them anyway, markets use non-deliverable forwards, or NDFs. Two parties agree on a rate for a future date, and on that date, only the difference between the agreed rate and the prevailing fixing rate is settled, in a convertible currency like the dollar. No actual yuan, rupee or won changes hands.

Why should a scalper care? Because NDF markets influence spot prices in the restricted currencies, especially during hours when onshore markets are closed. A move in the NDF can foreshadow what the onshore rate does at the next open, and some retail pairs quoted by brokers track the offshore market rather than the onshore one.

The mechanics also explain odd behaviour around fixing times. NDF positions are settled against a published fixing, and flows concentrate near it.

Retail traders rarely access NDFs directly. But knowing they exist helps interpret gaps and quirks in pairs like USDINR or USDKRW at the open.

For a sense of scale: NDF volumes in currencies like the Indian rupee, Korean won and Brazilian real run into billions of dollars a day, and in some cases the offshore market is larger than the onshore one. Moves in NDFs during Asian hours often set the tone for the local open.

A related concept is the fixing: each NDF contract settles against a published reference rate, set by the central bank or a polling process. Positioning ahead of fixings can create small bursts of volatility that appear random on a chart but follow a calendar.

Has an NDF-related quirk ever explained an unexpected move in an emerging market pair?