Non Deliverable Forward (NDF)

Non-deliverable forward is a method used by instructional investors or hedge funds to create a hedge against unpredictability, where the involved parties are tied to an underlying asset through a pre-established settlement.

It is a type of derivative where the contract is made to buy or sell on a specified date on the price called forward price, consequently, volatility is restricted by locking the rate terms.

The party entering the deal enters an extended position and the party selling enters a short post. Such an arrangement is made when the exchange payment is made through a notional amount. 

It is like a regular commodity future where you compare currency exchange but on maturity, one may not be required to make physical deliveries.

The pricing of such forward commodities is based on interest rate parity formulae that are determined through a calculation involving the equivalent returns over the period and the current spot exchange rate.