• A Non-Deliverable Derivative (NDD) is a financial derivative in which settlement generally occurs through cash payment rather than physical delivery of the underlying currency/asset.

  • In currency markets, an NDF (Non-Deliverable Forward) is a common example.

  • The difference between the agreed exchange rate and the prevailing reference rate is settled financially.

  • NDFs are particularly important for currencies that have restrictions or limited convertibility.

  • They are generally traded in over-the-counter (OTC) markets.

  • RBI regulates the Indian foreign-exchange derivative market under the FEMA framework.

Key Pointers

  • Settlement: Cash

  • No physical delivery: Yes

  • Common example: NDF

  • Market: Often OTC

  • Use: Currency/interest-rate risk management