What does Non Deliverable Forward NDF mean?
A Non Deliverable Forward (NDF) is a forward traded over the counter (OTC) whereby the settlement between the parties to the contract is made on net profit/loss incurred on the contract and not by delivery of the underlying. In this type of forward hedging mechanism, the currency in which the settlement is made and the date of settlement is generally fixed at the time of entering into the contract. It is used both in foreign commodities as well as currencies contracts.
Futures Knowledge Explains Non Deliverable Forward NDF
The settlement is on the difference between the contract price set at the time of entering into the contract and the prevailing spot price. Since the settlement is made on net basis, there is no exchange of principal.