Non-deliverable swap (NDS) definition

Non-deliverable swap (NDS) is a currency exchange between major and restricted/non-convertible minor currencies. This means that the two currencies involved in the exchange are not actually offered, unlike a typical cash exchange where cash flows are physically exchanged. Instead, NDSs are usually cashed in US dollars. The estimated cost is based on the difference between the exchange rate established in the currency contract and the spot rate at which one party pays the difference to the other. A non-deliverable swap can be thought of as a series of non-deliverable forwards joined together.

A non-deliverable swap (NDS) is a type of exchange that pays and settles in US dollar equivalents instead of the two currencies being exchanged. Therefore, the exchange is termed non-convertible (restricted) because the underlying currency is not physically supplied. NDSs are frequently utilized when the underlying currency is difficult to obtain, illiquid or volatile, such as developing countries currencies, or those with restrictions, such as Cuba or North Korea.

Non-deliverable swaps (NDS) explained

A non-deliverable swap (NDS) is a swap of different currencies, a major and minor currency that is restricted. Cash flow on most exchanges physically changes when a swap occurs, contrary to what occurs in the case of NDS. Non-deliverable swaps don’t physically alter cash flows because the currencies are not transferred. The two currencies involved in the swap don’t get delivered, which is why they are termed non-deliverable swaps. They aren’t available on the exchange. International companies use NDS to minimize the risk of profit margins if they’re prevented from transferring profits home through currency controls.

They also use NDSs to hedge the risk of excessive depreciation or amortization in limited currencies with little liquidity and to avoid excessive local currency costs. Financial institutions in currency-restricted countries use NDSs to hedge foreign currency loans. There are ways to pay NDS regularly. This is usually done in cash using US dollars. To settle between the two currencies involved, the value is based on a spot exchange rate and the exchange rate specified in the currency contract. To obtain an NDS settlement, one of the parties involved must pay the other party the difference in tax rates between when the contract was signed and when the agreement was reached.

The most important variables in NDS are:

Transaction amount or notional amount

Two currencies are involved (the non-deliverable currency and the currency used for settlement)

Settlement date

Contract exchange rate

Date and the fixing rates – specific dates for which spot rates would be obtained from reputable independent sources.

Non-deliverable swaps (NDS) include limited significant and minor currency exchanges. NDS differs from the non-deliverable forward exchange (NDF) in two main ways. NDFs usually do not involve the main currency; the difference between the contract rate and the spot rate is an agreed-upon nominal amount. The US dollar is the most widely used payment mechanism for cheap swaps.

Swaps index on the screen

FAQ – The most asked questions about the non-deliverable swaps:

What is the meaning of a Non-deliverable swap?

An NDS or non-deliverable swap is a difference between minor and significant currencies while swapping. Most of these currencies will be either limited or cannot be exchanged. During this swapping process, there is no involvement in the delivery of currencies.

When is the NDS used?

A non-deliverable swap is usually used when the original currencies are hard to get, unstable, or illiquid.

To whom is the NDS quite helpful, and why is it so?

A non-deliverable swap is helpful to multinational corporations to alleviate the risk, disallowing them to repatriate earnings due to currency controls. Some MNCs use a non-deliverable swap to evade the risk of sudden deflation or reduction in a restricted currency with little liquidity. Non-deliverable swaps are also helpful for them to avoid the exorbitant price of swapping currencies in the domestic market. An NDS is also quite handy for financial institutions in countries with swap limits used to circumvent their foreign currency credit exposure.

What are the key variables used in an NDS?

Some of the important variables used in a non-deliverable swap include the estimated amounts, two currencies, resolution dates, swapping contract rates, fixing dates, and fixing rates.

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Last Updated on January 28, 2023 by Arkady Müller