What is a non-deliverable forward (NDF) contract?

A non-deliverable forward (NDF) contract is primarily a financial derivative instrument used to hedge or speculate on the future exchange rates of currencies. In the case of NDFs, there is no physical exchange of the currencies involved, which distinguishes it from traditional forward contracts. Instead, these contracts are settled in cash based on the difference between the contracted forward rate and the spot rate at the time of settlement.

This mechanism allows parties to engage in currency speculation or risk management without the need to actually deliver the currencies, making it especially advantageous in markets where currency convertibility may be restricted. The focus of an NDF is solely on the rate movement, rather than carrying out an actual exchange, which aligns perfectly with the definition of a contract to speculate on future rates without currency exchange.