In finance, a forward contract is a non-standardized contract between two parties that agree to carry out a specific transaction at a future date. The transaction will consists of the party in the long position purchasing a specific asset from the other party, for a predetermined price (the delivery price). The party that is obliged to sell is in a short position.
Forward contracts are commonly utilized for speculation, for currency risk hedging and for interest risk hedging. They are non-standardized contracts that can be tailor-made for the specific needs of the two counterparts. Some forward contracts require no actual delivery of the underlying to take place – they can be settled in cash instead.
Forward contracts are not exchange listed. When they are traded, the trading takes place over-the-counter (OTC). There is no clearing-house, which means you should be careful when selecting your counterpart.
A non-deliverable forward (NDF) is a forward contract where no asset can be delivered. The difference between the two counterparts is always settled in cash or similar, never with the delivery of any actual equity, commodity, etc.
Trading in NDF:s rose to popularity among speculators in the 1990s, especially in emerging markets where governments tried to exercise capital controls, banned or severely restricted FX trading, and prohibited large quantities of currency from leaving the country.
So far, NDF:s are only trader over-the-counter – there are no exchange-listed NDF:s.
NDF:s tend to be short-term forwards. Short-term currency forwards that are to be settled in United States Dollars dominate the NDF sphere, but commodity NDF:s are also quite popular.