Non-Deliverable Forwards (NDF)

Trading Emerging Market currencies-Asia Currency Contracts

In recent years, Asian currency revaluation has become a hot topic as many grow to become stronger in their economy. The emergence of China as a world economy power has also sparked a series of calls for the revaluation of the Chinese Reminbi.
However many of these Asian currencies are regulated currencies, which mean it is pegged to a fixed US exchange rate and direct trading is not possible.

There was no opportunity for investors to hedge the exposure on such currencies or take the currencies into their portfolio. The availability of Non deliverable forward contracts evolved as a means to satisfy the demands of many corporate and individuals with commercial interest in these currencies, enabling them to hedge their exposure on these regulated currencies or to speculate on their fluctuation.

Then, speculators have also joined the bandwagon to speculate on their prediction on any policy change on the market. For example, some speculators are holding a short position on USDCNY NDF. They are expecting that the Chinese authority loosen their policy.
Phillip Futures has also recognized the increased interest in this sector of market and thus launched Asian Currencies contracts (also known as Non-deliverable forwards) in April 2005.

These are net cash settled forward on emerging market currencies, thus not involving any physical delivery of the transacted currencies.  Similar to FX Margin trading, there is leverage facility and it is priced factoring in interest rates of the countries and the market participants’ expectation, as well as economical and geopolitical situations.