What is NDF and how to start trading NDFs

What is NDF Trading?

Buying and selling NDF currencies to profit from fluctuations in their exchange rate without actually holding them is known as NDF trading.


This involves two parties agreeing to take opposing sides at a predetermined quantity at a predetermined rate. The difference between the spot price (at the moment of settlement) and the agreed-upon contract is settled by the counterparty.

For a better understanding, let's examine the case of NDF trading. Consider a scenario in which you believe the Japanese yen will appreciate in value relative to the US dollar, and another party believes the US dollar will appreciate in value relative to the Japanese yen.

With a one-month contract size of $10,000, you two have signed an NDF agreement. 100 is the agreed-upon exchange rate. The current exchange rate for the JPY/USD pair is 105 one month after the maturity date.

It indicates that your guess was accurate, and the other party will give you the monetary difference. As a result, you will make (105-100)*10,000.

1. What is NDF and how to start
trading NDFs
NDF is one of the most popular ways to trade in currencies and is widely
used in countries where forex trading is banned. In this article, we will
learn the concept of trading NDFs with examples and its key benefits.
What are NDFs?

Non-Deliverable Forward or NDF is a financial derivative to trade in a
range of currency pairs and make huge profits.

Under this method, two parties enter into a forward contract to exchange
the difference of currency value fluctuation at a future date.

The settlement takes place in cash instead of physical delivery.
Generally, the time frame of the contracts is from a month to a year.


What is NDF Trading?

2. NDF trading is the process of buying and selling NDF currencies to take
advantage of their exchange rate fluctuation without physically owning
them.

Under this, two parties agree to take opposite sides at a specific amount
at a contracted rate. The counterparty settles the difference between the
contract (agreed upon) and the spot price (at the time of settlement).

Let us have a look at the NDF trading example for a better
understanding. Suppose you think that the value of the Japanese Yen
will rise against the US dollar, and a party feels that the value of the US
dollar will rise against the Japanese Yen.

So you both have entered into an NDF contract for one month, and the
contract size is 10,000$. The agreed-upon exchange rate is 100. After
one month on the maturity date, the prevailing exchange rate of the
JPY/USD pair is 105.

It means that your prediction went right, and the other party will pay you
the difference in cash. So you will earn a profit of (105 -100)*10,000.

How to start trading NDF

Non-Deliverable Forward can be a popular choice for beginners,
especially for traders interested in the forex market. Here is a
step-by-step procedure for trading in NDFs. It will help you in starting
your NDF trading journey.

Learning: The first step to trade in NDF is to get yourself well versed
with the currency market, as NDF is a product to deal with currencies.
So get yourself well versed with forex trading, its functions, features,
strategies, and market conditions.

Also, get an in-depth understanding of NDF contracts and terminologies
like spot rate, prevailing rate, contract size, settlement date, etc. It will

3. help you clear your basics and place trade effectively using NDF
contracts.
Identify currency pair: Once you have grabbed the knowledge of
trading in NDFs, it's time to select the instrument to trade in. There are
numerous convertible and non-convertible currencies you can trade in
using these contracts.
However, selecting the right currency pair is a crucial step as it will have
a significant impact on the trading outcome. A trader should choose a
currency pair after in-depth research and analysis. In addition,
knowledge of market conditions and factors of both the currencies in a
pair is a must.

Select a Broker: NDF trading takes place over the counter, so you need
a broker platform that connects you with live market conditions and
provides you with a range of currencies.

Apart from these, the broker will provide you with facilities like leverage,
analysis tools, trading software, insight, news, and many more things.
So basically, the quality of the broker will directly impact the quality of
trade. Beirman Capitals provides you with exclusive services and stays
available for 24/5.

Open an Account: After selecting a good broker for trading NDFs, it's
time to move a step forward and open an account to start your trading
journey.

There are different types of accounts you can choose from based on
experience, services, and trading capital, like demo account, micro
account, premium account, managed fund account, Islamic account, etc.
So open an account with us and take advantage of our premium
services.

4. Market Analysis & Strategy Making: Trading in NDFs or any other
financial instruments occurs based on prediction. These predictions are
made after analysis of sentimental, fundamental, and technical analysis
factors.

After this, a trader needs to develop an effective trading plan for placing
a trade based on their prediction. A good strategy involves all the crucial
elements of trade that traders require at any stage of trading.
Start trading: Once you are done with strategy making, it is time for
implementation. Place your first trade based on the strategy and
analysis.
Placing a trade is a crucial step and needs to be done after implying
proper order, risk, and leverage management to eliminate the chances of
huge losses.

Why to trade NDFs

The increasing popularity of the financial market, especially the forex
market, has given birth to different trade instruments. Here are some
benefits that make NDF different from the others.

Wide range of currencies: One of the key advantages of trading NDFs
is you can have the option to trade in a wide variety of currencies,
especially in the currencies of emerging and developing nations.

NDFs are the best instrument to trade in non-convertible or partially
convertible currencies. You can trade in currencies like Chinese Yuan,
Brazilian Real, South Korean Won, Taiwan Dollars, etc.

Basically, with the major currencies, you can have access to the
currencies of the countries where forex trading is subject to restrictions.

5. No ownership: NDF enables you to trade in currencies without actually
owning the physical assets and take advantage of their price fluctuation.
Flexibility and Customization: NDF offers traders the flexibility to trade
anytime in any currency with any strategy. In addition, a trader can also
customize the contract conditions like notional amount, fixing date, etc,
according to their needs.
Hedging and risk management: NDF contracts can be used by traders
for risk management and hedging purposes. Institutions and traders can
use these instruments to deal with adverse currency price fluctuation
movements.
Competitive Cost: NDF is amongst the most cost-effective ways to
trade in currencies with competitive currency spreads and trading fees.
Also, you can start trading in NDFs with little capital, which makes it a
suitable choice for novice traders.
Liquidity: The NDF Market offers better liquidity to trade in currencies of
emerging nations as compared to traditional currency markets.
Wrapping Up

NDF is amongst the best instruments for trading in currencies and
hedging the risk of exchange rate fluctuation with many advantages like
flexibility, customization, a wide range of options, cost-effectiveness, etc.

However, the above advantages came with the significant risk of losing
money. A trader should embrace knowledge, skills, positive psychology,
and emotional balance to manage risk efficiently for trading NDFs.