Non-Deliverable Swap (NDS)
Candlefocus EditorUnlike the usual currency swap in which the two currencies involved in the swap are converted and exchanged against each other, NDS involves no physical delivery of the underlying currencies. Thus, NDS enable parties to avoid the usual currency exchange rate risk and disparity in the prices of the two currencies. Consequently, the two parties agree to swap underlying assets and payments in the same currency, at a rate determined on the day of swap.
NDS are used in cases where it isn’t possible or practically feasible to convert between the two currencies. This could be due to the underlying currency being difficult to obtain, illiquid, or volatile. Examples of such currencies include those from developing countries, North Korea, or Cuba for which foreign exchange restrictions apply.
NDS enable companies, especially international trading firms, to transact business fairly without concerns about the underlying currency in the transaction. NDS can also benefit governments by lowing their foreign exchange risks. As a result, more countries are beginning to adopt NDS as a viable alternative for their currency transactions.
In conclusion, NDS are valuable financial tools that enable corporations, traders, and governments to safely and securely execute deals in any type of currency, regardless of economic stability. Furthermore, these swaps are an attractive option for market participants due to their cost effectiveness, liquidity, and de-risking capabilities. Ultimately, NDS are an effective way to secure foreign exchange transactions in volatile financial markets.