What is Non-deliverable Forward Contract (NDF Contract)?
Non-deliverable Forward Contract is foreign exchange derivatives product traded over the counter. The customer and the Bank agree to exchange two currencies at pre-determined rate at a specified date in the future. However, there is no physical delivery of two currencies. Both parties will compare the spread between the spot rate and the pre-determined rate and settle the spread in either currency (if USD against RMB, the settlement currency will be in USD).
RMB NDF Contract Characteristics
- The minimum contract size is USD10,000
- The tenor of the contract can be 1-month, 2-month, 3-month, 6-month or 1-year
- No handling fee
Example 1
Customer: |
Mr. A |
View on RMB: |
RMB will appreciate against USD in the future |
NDF Contract: |
Customer Buy - RMB Bank Sell - RMB
Customer Sell - USD Bank Buy - USD |
Contract Date: |
1 November 2005 |
Tenor: |
1-month |
Valuation Date: |
29 November 2005 |
Settlement Date: |
1 December 2005 |
Forward Rate: |
USD 1 against RMB8.030 |
Nominal Value: |
USD100,000 |
Required Deposit: |
USD100,000 or its equivalent in any other foreign currency |
Scenario 1
| The spot rate at the Valuation Date: |
USD1 against RMB8.000 (RMB appreciates against USD) |
Settlement Amount:
|
USD100,000 X (8.030 ¡V 8.000) / 8.000
= USD375 |
| Mr. A will gain on the settlement date USD375 when RMB appreciates against USD. |
Scenario 2
| The spot rate at the Valuation Date: |
USD1 against RMB8.060 (RMB depreciates against USD) |
Settlement Amount:
|
USD100,000 X (8.030 – 8.060) / 8.600
= (USD372.20) |
| Mr. A will lose USD372.20 on the settlement date when RMB depreciates against USD. |
Example 2
| Customer: |
Ms. B |
| View on RMB: |
RMB will depreciate against USD in the future |
NDF Contract: |
Customer Buy - USD Bank Sell - USD
Customer Sell - RMB Bank Buy - RMB |
| Contract Date: |
3 December 2005 |
| Tenor: |
2-month |
| Valuation Date: |
1 February 2006 |
| Settlement Date: |
3 February 2006 |
| Forward Rate: |
USD 1 against RMB8.020 |
| Nominal Value: |
USD100,000 |
| Required Deposit: |
USD100,000 or its equivalent in any other foreign currency |
Scenario 1
| The spot rate at the Valuation Date: |
USD1 against RMB7.950 (RMB appreciates against USD) |
Settlement Amount:
|
USD100,000 X (7.950 – 8.020) / 7.950
= (USD880.50) |
| Ms. B will lose USD880.50 on the settlement date when RMB appreciates against USD. |
Scenario 2
| The spot rate at the Valuation Date: |
USD1 against RMB8.060 (RMB depreciates against USD) |
Settlement Amount:
|
USD100,000 X (8.060 – 8.020) / 8.060
= USD496.28 |
| Ms. B will gain USD496.28 on the settlement date when RMB depreciates against USD. |
You can seize the investment opportunities by subscribing the RMB Non-deliverable Forward Contract of buying or selling RMB against USD depending on your expectation of the movement of RMB exchange rate.
How to find out more
Risks Disclosure
The risk of Non-deliverable Forward Contract can be substantial. You may sustain loss in part, whole or in excess of the contract amount. Non-deliverable Forward Contract is illiquid instrument which is not transferrable or tradeable and you should therefore be prepared to hold your investment until the settlement date. You should perform own due diligence on this investment. If there is any doubt, you should seek independent legal, financial and other professional advice prior to any subscription.
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