An NDF is a name given to a short-term, cash-settled currency forward between two counterparties. On the contracted settlement date, the adjustment of profit or loss takes place between the two counterparties and that adjustment is based on the difference between the contracted NDF rate and the prevailing spot FX rates on an agreed notional amount.
An NDF include the following features:
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The notional amount: This is the name given to the “face value” of the NDF, that is agreed between the two counterparties. You should note down here that there is never any intention to exchange the notional amounts in the two currencies.
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The fixing date: The fixing date is that day and time whereby the comparison between the NDF rate and the prevailing spot rate is made.
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The settlement (or delivery) date: The settlement (or delivery) date is referred to as the day when the difference is paid or received. It depending on the currencies dealt, one or two good business days before the settlement date is the fixing date.
