What is a Non-Deliverable Swap (NDS)?
A Non-Deliverable Swap (NDS) involves the exchange of one currency for another. The underlying is the US dollar, while the other currency is the Brazilian real. In this case, the trader receives an alternative currency in return for the US dollar. The exchange rate is determined by prevailing spot rates in the market. The fixing rate will usually be determined by calling dealers in the market for quotes at a specified time and taking an average of the quotes. The exact method of determining the fixing rate will be negotiated at the time of the trade. Most NDF markets have their own conventions.
A restricted currency swap
A Non-Deliverable Swap is a restricted currency swap. The currencies exchanged are not exchanged for the delivery of the goods or services. Because of these restrictions, they are not ideal for foreign currency trading. This type of swap is most commonly used by international companies to minimize risk. However, these contracts can be prohibitively expensive due to the restrictions imposed by the currencies involved. In some cases, this can prevent the companies from transferring profits home.
A Non-Deliverable Swap is not a term swap. Instead, it is a type of currency exchange. It is a cash exchange. Unlike a traditional currency swap, a non-deliverable swap does not alter cash flow and does not involve a major currency. A non-deliverable swap is the best choice for those seeking to hedge their risks. For this reason, this type of trade is often used by emerging and minor-currency countries to avoid local market volatility and exchange costs.