Non-Deliverable Forwards

A standard FX forward ends with both currencies physically changing hands on the value date. That's impossible for currencies like the Chinese yuan (offshore restrictions aside), Indian rupee, or Korean won when the counterparty is outside the country and capital controls block or restrict actual delivery. A non-deliverable forward (NDF) solves this by never delivering the restricted currency at all: at maturity, the contract compares the agreed forward rate to an official reference rate published on that date, and only the difference, converted into US dollars (or another hard currency), is paid.

For example, a trader who agreed to buy 100 million Indian rupees forward at 83.00 per dollar, and finds the reference rate at maturity is 84.00, doesn't receive rupees. Instead they receive the dollar value of the gain: the contract implied $1,204,819 worth of rupees at 83.00, and that same rupee amount is worth about $1,190,476 at 84.00, so they're paid the roughly $14,000 difference in cash.

Because no restricted currency ever moves, NDFs can be traded and settled entirely offshore between counterparties who may not even have onshore banking access. This makes them the standard way global funds get directional or hedging exposure to currencies that remain officially non-convertible, at the cost of tracking risk if the offshore NDF rate and the onshore reference rate drift apart during periods of capital-control stress.