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Chapter 9

Onshore And Offshore Currency Trading


Onshore markets in currency trading are quite straight forward. If you trade currency futures on the NSE or BSE or if you buy a forward cover from a bank in India to cover risk, it is basically an onshore market. When the currency is traded vis-à-vis other foreign currencies within the shores it is called onshore currency markets. Normally, it is the onshore markets that are closely regulated by the nodal regulators like the RBI and SEBI.

Offshore markets are slightly more complicated. They are traded in a neutral country. For example, the USDINR contract is traded in over the counter (OTC) market in some principally large markets like London, Singapore and Dubai. This is popularly called the Non-Deliverable Forward (NDF) market. These are outside the purview of the RBI and SEBI, which is one of the reasons the regulators are wary of such offshore markets. These offshore markets also cannibalize a chunk of the onshore volumes. That is because; large traders and investors prefer to hedge their risk in the offshore markets considering that they are less regulated and the costs are much lower.


Non-Deliverable Forwards (NDF) are foreign exchange forward contracts traded in the OTC market at offshore destinations, generally major international financial centres. An NDF contract is similar to a regular forward foreign exchange contract but does not need physical delivery of currencies at the time of maturity. In fact, NDF contract is typically cash settled in international currency on a specified future date. Since the NDF market operates in overseas financial centres, it remains outside the regulatory purview of the local authorities.

Why does NDF market develop? You will typically find NDF markets in currencies where markets are less developed locally or the tax structure is unfavourable. An NDF market generally grows when the onshore forward market is either under-developed or its access for market participants is restricted. As market players’ interest grows in a particular currency with convertible restrictions, NDF market generally gains momentum in overseas financial centres. As emerging markets start to develop, foreign investors may find the need to hedge currency risk but may be stifled due to limited liquidity in forex markets locally. Such investors prefer to hedge their net positions in the NDF market. Major participants in NDF market include foreign investors, corporates doing business in countries with exchange controls, hedge funds, commercial and investment banks, currency speculators etc. Quite often, large players participate in the onshore and offshore markets at the same time. NDF currency markets also grow because of the support of carry trades.

Quite often the NDF market can be an important lead indicator. Ahead of the Asian crisis of 1997, interest in NDF trading had increased significantly, as devaluation in local currencies was widely expected in the market. This acted as a lead indicator. Even in the Indian context, when the Indian rupee crashed sharply in October 2018, the early indications were already there in terms of the short build up in the NDF market. In fact, nowadays even central banks and governments track the NDF market closely for advance signals which can help them pre-empt such currency challenges. Standard onshore forward exchange contracts are priced based on interest rate parity calculations (interest rate differential and current spot exchange rate). On the other hand, NDF markets also factor in other parameters like volume of trade flows, liquidity conditions, and counterparty.

In trading parlance, NDF contracts are outright forward or futures contract in which counterparties settle the difference between the contracted NDF price or rate and the prevailing spot price or rate on an agreed notional amount. It needs to be remembered that there is no counterparty risk guarantee in forward markets, unlike in futures market and the market largely runs on trust. That is why NDFs are more like bets than like contracts and that is why they are also known as forward contracts for differences. NDFs are prevalent in some countries where forward FX trading has been banned by the government as a means to prevent exchange rate volatility. For currencies, Dubai, London and Singapore are some of the popular NDF markets due to their extremely friendly regulator environment.

Which currencies does NDF market exist?

The NDF market is an over-the-counter market (deals struck on telephone). NDFs began to trade actively in the 1990s. NDF markets basically started off in emerging markets with capital controls, where the currencies could not be delivered offshore. Most NDFs are cash-settled and denominated in US dollars. The more active banks quote NDFs from between one month to one year, although some would quote up to two years upon request. The most commonly traded NDF tenors are IMM dates, but banks also offer odd-dated NDFs. NDFs are typically quoted with the USD as the reference currency, and the settlement amount is also in USD. That is one of the reasons a lot of global investors prefer to hedge their risk in the NDF market as the dollar denomination synchronizes with their underlying exposure, which is also normally denominated in US dollars. Let us now look at some of the popular currencies on which NDF contracts are available.

Some of the major currencies in the world where NDF market is available on dollar denominated differential trade are Chinese Renminbi, Indonesian Rupiah, Indian Rupee, South Korean Won, Malaysian Ringgit, Philippine Peso, New Taiwan Dollar, Vietnamese Dong, Egyptian Pound, Kazakh Tenge, Nigerian Naira, Argentine Peso, Brazilian Real, Chilean Peso, Colombian Peso, Costa Rican Colon, Guatemalan Quetzal, Peruvian Nuevo Sol, Uruguayan Peso and Venezuelan Bolívar.


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. There is no delivery of currency in the NDF market and all transactions are only cash settled.

Key parameters of an NDF trade

  • Notional amount is the "face value" of the NDF, which is agreed between the two counterparties. This is purely theoretical to measure the profits / losses. There is no delivery intent at any point of time.
  • Fixing date is the day and time whereby the comparison between the NDF rate and the prevailing spot rate is made within the boundaries of a pre set agreement that is documented between the two parties.
  • Settlement date is also popularly referred to as the delivery date in NDF parlance. This is the pre-determined day on which the difference is paid or received. It is usually one or two business days after the fixing date to complete requisite formalities.
  • Contracted NDF rate is the rate agreed on the transaction date and is normally the outright forward rate of the currencies dealt.
  • Prevalent spot rate refers to the rate on the fixing date usually provided by the central bank, and 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 is agreed when a trade is initiated and that is the formula that is adhered to.

Since NDF is a cash-settled contract, the notional amount is purely theoretical and is never exchanged. The only exchange of cash flows is the difference between the NDF rate and the prevailing spot market rate. Therefore to condense the idea into a formula:

Cash Flow = (NDF rate – Spot rate) × notional Quantity

While theoretically there is counter party risk exists in NDF contracts, it is closed market and participants tend to be wary of their credit rating and their standing and hence the defaults tend to be quite low. In an NDF both the parties to a transaction are committed to honour the deal. Nevertheless, either counterparty can cancel an existing contract by entering into another offsetting deal at the prevailing market rate.


NDF market attracts a cross section of participants from various sides of trades who try to either hedge their risk or purely make profits trading. Some of the key players are:

  • Short-term traders are basically trading based on technical charts and news flows and have a very short term view running into a few hours or a few days.
  • Scalpers are a common player in the NDF market who also functions as market makers as they keep trading in and out of the market for small spreads.
  • Positional traders who don’t want to take non-dollar risk also use the NDF market to keep rolling positions to bet on a currency direction.
  • Exporters use the NDF market to hedge their risk against appreciation of the local currency vis-à-vis the US dollar.
  • Importers use the NDF market to hedge their risk against depreciation of the local currency vis-à-vis the US dollar.
  • Arbitrageurs look to capitalize on the price differentials between the on shore markets and the off shore markets to lock in an assured price difference.


Trading in the Indian currency market has its own unique challenges in the onshore market. Here’s why:

One, quite often, the markets can be quite illiquid for large trades.

Secondly, the ready forward market in India is quite opaque and that is why many foreign investors prefer the NDF market in London, Dubai or Singapore.

Thirdly, the NDF markets are less regulated in terms of disclosures and limits.

Fourthly, the compliance requirements are much lower in the NDF market as compared to the onshore market.

Lastly, the NDF market is denominated in US dollars and that makes it a lot more convenient for global investors whose investment returns are typically measured in dollar terms.


The offshore market in currencies (NDF) market offers some key advantages to currency traders. A few such advantages are enumerated herein.

  • The NDF markets are less subjected to stringent regulation by the financial market regulator and the central bank making it easier to trade.
  • As a result the compliance requirements in the NDF market are much lesser compared to the onshore market.
  • The exchange costs in the onshore market can be avoided in the NDF market, being an informal price movement market. This makes it more economical.
  • Since the offshore market is generally dollar denominated, global investors find it quite lucrative since their investment returns are measured in dollar terms.
  • Lastly, it is a round the clock market and time zones are not a constraint. Between Singapore, Dubai and London most of the time zones are covered.
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