Structure and features Of Non-deliverable forward Forex

An NDF is a short-term, cash-settled currency forward between two counterparties. On the contracted settlement date, the profit or loss is adjusted between the two counterparties based on the difference between the contracted NDF rate and the prevailing spot FX rates on an agreed notional amount.
The features of an NDF include:
the notional amount: This is the "face value" of the NDF, which is agreed between the two counterparties. It should again be noted that there is never any intention to exchange the notional amounts in the two currencies
the fixing date: This is the day and time whereby the comparison between the NDF rate and the prevailing spot rate is made.
the settlement (or delivery) date: This is the day when the difference is paid or received. Depending on the currencies dealt, the fixing date is one or two good business days before the settlement date.
the contracted NDF rate: This is the rate agreed between the two counterparties on the transaction date, and is essentially the outright forward rate of the currencies dealt.
the prevailing spot rate: The fixing spot rate on the fixing date is usually provided by the central bank, and is commonly calculated by calling a number of dealers in the market for a quote at a specified time of day, and taking the average. The exact method of determining the fixing rate will be agreed when a trade is initiated, but most NDF markets have their own conventions.
Because an NDF is a cash-settled instrument, the notional amount is never exchanged. The only exchange of cash flows is the difference between the NDF rate and the prevailing spot market rate that is exchanged on the settlement date.
Consequently, NDFs are "non-cash" products, which are off-the-balance-sheet and as the principal sums do not move, possess much lower counter-party risks. NDFs are committed short-term instruments; both counterparties are committed and are obliged to honor the deal. Nevertheless, either counterparty can cancel an existing contract by entering into another offsetting deal at the prevailing market rate.