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Sir
I understand the principle of the NDF but do not understand how the bulk of the cash changes hands. I see they only pay the difference (rise or fall in rate) in a strong currency, but what about the main amount?
The amount on which the NDF is calculated is a notional amount – the notional amount is never exchanged. The only cash exchanged is the different between the exchange rates as applied to the notional amount.
Yes – it is like a bet (just as buying and selling futures is a ‘bet’).
However financial managers use both of them to hedge against the risk of another transaction.
(Mind you, I don’t recollect NDF’s ever being mentioned in the exam!)
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