NDF vs CFD
NDF and CFD are financial tools used in the financial markets in many parts of the world, especially Forex markets, brokers and investors to book profits on transactions and to safeguard financial risk that is common in financial markets. To minimize exposure to risk created by fluctuations in prices of commodities and foreign currencies. There are many similarities in these two tools but there are also differences that need to be highlighted.
NDF is referred to as non deliverable forward, and is a futures contract on a currency that is not traded heavily or is non convertible. The profit or loss on transaction is decided on the basis of difference in price of the currency at the time of the settlement and the rate that is agreed upon by the seller and the buyer at the time of carrying out the transaction. NDF has a time period as it is agreed upon on a date and is completed on the date of settlement. These NDF’s normally have a time period of one month but NDF’s that are longer with duration of one year are also common.
The prices of NDF’s are expressed in US dollars and today have become a very popular tool of hedging for many corporations as they serve to minimize exposure to risk in dealing in currencies that do not have many takers.
CFD is also called a contract for difference. This is a contract between a seller and a buyer. The buyer promises to pay the difference between the value of the asset at the time of conducting the contract and the value that is current at a future date. If this difference turns out to be negative (which happens when buyers anticipation goes wrong), then it is the seller who pays the difference in value.
Thus CFD’s are in effect derivatives that allow investors to gain advantage of moving prices and provide an instrument to speculate in financial markets.