The Non Deliverable Forward (NDF) markets have seen considerable growth in recent years particularly in the emerging Asian economies. Imposed FX restrictions have led private companies, investors and non domestic players to seek an alternative for their hedging and speculative needs.
No exchange takes place of the two currencies principal sums. The only cash flow is the movement in the difference between the traded NDF rate and the fixing rate at expiry. The P&L is transferred on settlement in the convertible currency; generally in US dollars (multiple fixing mechanisms are available). Once a trade has been established the position can be closed or rolled at anytime or left to expire and be cash settled against the fix rate.