Non-Deliverable Swap or NDS
Like Non-Deliverable Forward (NDF), Non-Deliverable Swap (NDS) is cash settled contracts which do not involve delivery of underlying instrument. The only difference is that the cash settlement is done through a major (fully convertible) currency like U.S. Dollar. Similar to NDF, NDS also involves two currencies, usually one major currency and one restricted currency.
Non-deliverable swaps allow emerging market companies operating with minor currencies to hedge against currency risks. In NDS, the interest rate of the restricted currency is fixed at that of the other is kept fixed or floating. Interest rate payments are done on quarterly, semi-annual or annual basis and principal amount is paid on maturity of the contract. Any payments which include the restricted currency are done through major currency based on prevailing sport exchange rate.
For example, two companies enter into a non-deliverable currency swap for $1 million, which involve exchange of USD and a restricted currency (eg: South Korean Won, KRW). If after 3 months the one company has to pay KRW worth 1,000,000 to the other company, and the prevailing spot exchange rate is 1300 KRW for $1, then the company pays $769.23 (1,000,000/1,300).
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Non-deliverable swaps allow emerging market companies operating with minor currencies to hedge against currency risks. In NDS, the interest rate of the restricted currency is fixed at that of the other is kept fixed or floating. Interest rate payments are done on quarterly, semi-annual or annual basis and principal amount is paid on maturity of the contract. Any payments which include the restricted currency are done through major currency based on prevailing sport exchange rate.
For example, two companies enter into a non-deliverable currency swap for $1 million, which involve exchange of USD and a restricted currency (eg: South Korean Won, KRW). If after 3 months the one company has to pay KRW worth 1,000,000 to the other company, and the prevailing spot exchange rate is 1300 KRW for $1, then the company pays $769.23 (1,000,000/1,300).
NobleTrading.com Offers Online Stock Trading, Online Options Trading
Online Futures Trading, Online Forex Trading
Worldwide Brokerage Service, Day Trading Brokerage
posted by NobleTrading at
8:45 AM
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