1. Non-Deliverable Forward. Please edit this item for help. NDF: Non-Deliverable Forward, the full name is Non-Deliverable Forward. RMB non-deliverable forward is a common financial term and is often used to measure overseas markets’ expectations for RMB appreciation. Non-deliverable forward contracts are traded in the offshore OTC Market, so they are often called overseas non-deliverable forwards. The NDF market originated in the 1990s. It provides hedging functions for the currencies of emerging market countries such as China, India, and Vietnam. Almost all NDF contracts are settled in US dollars. The currencies of Asian emerging market countries such as the RMB, Vietnamese dong, Korean won, Indian rupee, Philippine peso, etc. all exist in the NDF market. Companies that have trade relations with these countries or have branches can use NDF transactions to conduct hedging to avoid exchange rate risks. . Another function of the NDF market is that it can be used to analyze the expectations of the future trend of the exchange rates of these countries. Since the RMB is not yet freely convertible, understanding the basic knowledge of the NDF market is very beneficial to paying attention to the trend of the RMB exchange rate. Now I would like to introduce the overseas RMB to all investors. Non-deliverable forward (NDF) market.

Edit this paragraph: What is non-deliverable forward and its impact on China

[1] NDF refers to non-delivery forward foreign exchange (Non-Delivery Forward). It is a forward foreign exchange transaction model and a derivative financial instrument used for offshore transactions in currencies of countries and regions that implement foreign exchange controls. At the time of transaction, both parties determine the nominal amount, forward exchange rate, and maturity date of the transaction. Two days before the expiration date, the spot exchange rate of the currency is determined. On the expiration date, both parties to the transaction calculate the profit and loss based on the difference between the determined spot exchange rate and the forward exchange rate at the beginning of the transaction. The losing party pays the convertible currency as follows: USD is delivered to the beneficiary. The approach is that the parties to the transaction "do not need to deliver capital certificates or deposits when signing a sales contract" and do not need to deliver the principal when the contract expires. "Only the difference between the exchange rate agreed upon by both parties and the spot exchange rate at maturity is required to engage in liquidation." A trading tool for collection and payment. NDO (non-deliverable forward foreign exchange option), the operation logic is consistent with the concept of NDF, but it is extended from the concept of forward foreign exchange to option trading. The NDF market is an offshore market. For the Chinese government, it can refer to the pressure of RMB appreciation, which has no real impact on the value of the RMB. The RMB NDF market is a forward market that exists between banks and customers outside China. Its main purpose is to help customers with RMB expenditures or RMB income in the future hedge risks. However, when it expires, only the price difference is calculated and no delivery is actually made. The settlement currency is USD. Due to China's capital account controls, only a very small number of hedge funds can flow into mainland China to directly speculate on the RMB. The characteristic of hedge funds is that they come and go quickly. The transaction costs of entering China for speculation are high and the policy costs are high. Therefore, most of the money flowing into China to speculate on the appreciation of the RMB is not hedge funds, but overseas Chinese. Hedge fund attacks on China's yuan should be indirect, not direct. What is a forward contract (Forward Contract)? A forward contract (Forward Contract) is a common financial derivative (Derivatives). It is not only widely used in the foreign exchange market, but also in other situations such as bond investment. A forward contract refers to a contract in which both parties agree to exchange financial assets at a fixed price on a certain date in the future. The forward contract needs to specify the subject matter, validity period, execution price, etc. The main difference between forward contracts and futures contracts is that forward contracts are more flexible, while futures contracts are standardized contracts. Since futures contract trading adopts a daily debt-free settlement system, performance risk is lower and liquidity is greater. Forward contracts are generally traded over the counter due to their flexibility and low liquidity, while futures contracts are generally traded on exchanges. Calculation of RMB NDF contract price The forward exchange rate contract price is not only related to the expected exchange rate trend, but also has a great relationship with the interest rates of the two currencies. Domestic media often equate the RMB's one-year NDF exchange rate with the overseas market's expectations for the RMB exchange rate one year later. This is an imprecise calculation method. When the interest rate gap between China and the United States is too large, this wrong algorithm can easily mislead investors. decision. Formula

The above is the RMB forward exchange rate formula, where F is the RMB forward exchange rate, S is the RMB spot exchange rate, r is the US dollar interest rate, rf is the RMB interest rate, the term is T-t, and e is the natural logarithm . The calculation method commonly used by domestic media ignores the interest rate difference between China and the United States, which is a very imprecise calculation method. Investors must pay attention to this. Price trend of one-year RMB NDF contract

Here we might as well use the data on June 27 as an example: the one-year RMB NDF exchange rate is 6.4513, the one-year RMB interest rate is 4.14%, and the one-year RMB interest rate is 4.14%. The interest rate is 2.00%. F = 6.4513 * (1 + 2.00%) / (1 + 4.14%) = 6.3187 It can be seen that on June 27, the RMB one-year NDF contract price of 6.4513 represents the overseas market’s expectation that the RMB exchange rate will change one year later. Appreciated to 6.3187.

Due to the recent expectations of RMB interest rate hikes, the price of RMB NDF contracts has risen slightly. After reading the correct calculation method proposed above, investors will easily know that this is not because the pressure for RMB appreciation has decreased. Determinants of RMB NDF market price fluctuations Changes in expected RMB appreciation are the main reasons for RMB NDF contract price fluctuations. The expectation of RMB appreciation is mainly determined by the following aspects: Speeches by Chinese officials. U.S. officials speak. China's trade surplus. China’s foreign exchange reserves. China's economic growth rate. China's inflation rate. In addition, the price of RMB NDF contracts is also affected by the following reasons: China's interest rate adjustments. US interest rates adjust. Types of RMB NDF contracts RMB NDF contracts are traded in the offshore OTC market, including four contracts: January, March, June, September and December. Generally speaking, a company's fiscal year (Fiscal Year) is usually one year, so there is not much demand for hedging for more than one year, so it is not opened. RMB NDF contract price trends

To sum up, the RMB non-deliverable forward (NDF) market can be used for foreign trade and multinational enterprises to avoid RMB exchange rate risks, and can also be used to judge expectations for RMB appreciation. However, investors need to note that it is incorrect to simply equate the one-year NDF contract price with the overseas market's expectations for the RMB exchange rate one year later. When China's interest rates are higher than those in the United States, overseas markets' expectations for the RMB exchange rate are slightly higher than the erroneous conclusion drawn by the media simply based on NDF contract prices. If investors can master the knowledge of correctly calculating RMB appreciation expectations based on NDF contract prices, they can avoid the possibility of investment errors caused by wrong information. This is very important!

Another explanation: Non-deliverable forwards, referred to as NDF, are mainly used for the currencies of countries that implement foreign exchange controls. Currently, the RMB, Korean won, New Taiwan dollar and other currencies in Asia Non-deliverable forward trading is quite active. In non-deliverable forward foreign exchange transactions, banks act as intermediaries. Based on their different views (or purposes) on the exchange rate, the supply and demand parties sign a non-deliverable forward transaction contract. The contract determines the forward exchange rate. When the contract expires, only the The difference between the exchange rate and the actual exchange rate is settled for settlement. The settlement currency is a freely convertible currency (generally the U.S. dollar), and there is no need to deliver the principal of the NDF (restricted currency). The term of NDF generally ranges from several months to several years. The main trading varieties are one-year and less than one-year varieties. Contracts of more than one year are generally not actively traded.