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Swaps & NDF
Non-deliverable forwards
Learning Outcome
5
Understand offshore NDF trading.
4
Analyze exchange rate hedging.
3
Identify key NDF features.
2
Explain cash settlement.
1
Understand NDF for currency risk.
What is a Non-deliverable forward?
An NDF is an OTC currency contract settled in cash using the exchange rate difference, without physical delivery of the restricted currency.
Example:
Illustration: Hedging with a USD/INR NDF
A Singapore fund hedges a ₹10 crore investment by selling INR forward at ₹85/USD through an NDF. After 3 months, the RBI rate rises to ₹87/USD, confirming Rupee depreciation.
Settlement: The fund receives the USD gain from the ₹87–₹85 exchange rate difference. No Rupees are exchanged.
Net effect: The cash payout offsets the loss in INR value of the fund’s underlying investment when converted back to USD.
Buyer and Seller Roles
How is the Premium Calculated?
What is a Credit Event?
What Happens After a Credit Event?
Why Do People Use CDS?
Summary
5
CDS supports hedging, risk management, and credit analysis.
4
Credit events trigger settlement.
3
Key elements: Reference Entity, Spread, Tenor, Settlement.
2
Buyer pays premium; seller provides protection.
1
CDS transfers credit risk.
Quiz
What is the main purpose of a Credit Default Swap (CDS)?
A. To increase interest rates
B. To transfer credit risk
C. To buy company shares
D. To reduce inflation
Quiz-Answer
What is the main purpose of a Credit Default Swap (CDS)?
A. To increase interest rates
B. To transfer credit risk
C. To buy company shares
D. To reduce inflation
Swaps & NDF - Non-deliverable forwards
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