How do you hedge a currency you cannot deliver?
Everything so far assumed that on the value date, both currencies can actually be paid. For a significant part of the world that assumption fails. Many countries restrict the movement of their currency across borders — capital controls, licensing requirements, onshore-only settlement. A foreign investor may have genuine exposure to such a currency and no legal way to deliver it.
The market's answer is the non-deliverable forward (NDF).
The mechanics
An NDF is a forward in which neither notional is ever exchanged. Instead:
- The two parties agree a notional, a contract rate and a maturity
- On the fixing date (usually two business days before settlement), an agreed official or industry fixing rate is published
- The difference between the contract rate and the fixing is settled net, in a convertible currency — almost always US dollars
No restricted currency changes hands. The contract lives entirely offshore in dollars, which is why it works.
The settlement formula
For a pair quoted as units of the restricted currency per USD, the amount paid to the buyer of dollars is:
Settlement = Notional_USD × (Fixing − Contract rate) ÷ Fixing
The division by the fixing, not the contract rate, is the detail people get wrong. The profit arises in the restricted currency and must be converted into dollars at the rate prevailing on the fixing date — which is the fixing.
Worked example
A company will receive Korean won in a month and wants dollars. It buys USD 1,000,000 against KRW one month forward at an NDF rate of 1,350.00.
At the fixing date, the published rate is 1,380.00 — the won has weakened.
- Gain in won: 1,000,000 × (1,380 − 1,350) = KRW 30,000,000
- Converted at the fixing: 30,000,000 ÷ 1,380 = USD 21,739
The company receives USD 21,739 in cash. It never touched a won. That payment offsets the fact that its actual won revenue, converted at 1,380, buys fewer dollars than it would have at 1,350. The hedge worked, in dollars, entirely offshore.
Had the fixing come in at 1,320 instead, the same formula returns a negative number and the company pays: 1,000,000 × (1,320 − 1,350) ÷ 1,320 = −USD 22,727. A hedge is symmetric — it removes both outcomes, and that is the point.
Which currencies, and which fixing
NDFs are the standard offshore instrument for currencies including the Korean won, Taiwan dollar, Indian rupee, Brazilian real, Chilean peso, Colombian peso, Indonesian rupiah and Philippine peso. The Chinese yuan was historically a major NDF market; the growth of the deliverable offshore yuan (CNH) has changed that structure considerably.
The fixing source is a contract term, not a detail. Each market has a designated published rate at a designated time, maintained by a central bank, an exchange or an industry association. Because a single published number determines the cash flow on an enormous notional, fixing governance is a serious matter and has been the subject of regulatory attention in more than one market.
Why NDF pricing can leave parity behind
A deliverable forward is pinned to covered interest parity because the arbitrage — borrow, convert, lend — is executable. In a restricted currency, it is not executable: an offshore investor cannot freely borrow or deposit onshore.
So the NDF rate can drift away from the onshore forward, and the gap becomes a market-implied price of devaluation and control risk. A steeply weaker NDF curve than the onshore curve says the offshore market is paying up for protection. That divergence is one of the more informative signals in emerging-market finance, and it exists only because the arbitrage is blocked.
In the data
Restricted convertibility shows up in the data as two prices for one currency. The onshore yuan and the offshore yuan are quoted separately, below, and they do not print the same number.
On 29 September 2026 the dollar bought 6.6958 yuan onshore and 6.7057 offshore, about 0.15% apart. Nothing in a list of currency pairs flags either as restricted, deliverable or non-deliverable. Pick one because its name matched "yuan" and you have chosen a market without knowing you did.
Try it now
- A deliverable major is below — a pair where, if you hold the contract to maturity, currency genuinely moves. Measure one calendar month of it and write down both the rate you started from and the rate you finished at.
- Now apply the NDF settlement formula to a USD 1,000,000 notional over that month, using your two readings as the contracted rate and the fixing. Note that the dollar payout is not simply the percentage move times the notional — the division by the fixing is what makes an NDF settle in dollars instead of in the currency itself.
- Now imagine the same contract on a currency that cannot leave its country. Nothing about the arithmetic changes; only the settlement does. Write down what the contract would be worth to a company whose revenue is in that currency, and say in one sentence why deliverability is a property of the currency rather than of the trade.