Net Foreign Assets (NFA)

What are 'Net Foreign Assets (NFA)'

Net foreign assets (NFA) refer to the value of overseas assets owned by a nation, minus the value of its domestic assets that are owned by foreigners, adjusted for changes in valuation and exchange rates. A nation's Net Foreign Assets (NFA) position is also defined as the cumulative change in its current account over time. The net foreign assets position indicates whether the nation is a net creditor or debtor to the rest of the world. A positive NFA balance means that it is a net lender, while a negative NFA balance shows that it is a net borrower.

An alternative definition of “Net Foreign Assets” from the World Bank is that it is the sum of foreign assets held by monetary authorities and deposit money banks, less their foreign liabilities.

BREAKING DOWN 'Net Foreign Assets (NFA)'

Relating a nation’s NFA position to its cumulative change in its current account is conceptually easy to understand, since an entity’s debt position at any point in time is the sum total of its past borrowing and lending activity. If an entity’s borrowings total $500, but it has loaned out $1,500, it is a net creditor in the amount of $1,000.

Likewise, if a nation runs a current account deficit of say $10 billion, it has to borrow that amount from foreign sources to finance the shortfall. In this case, borrowing $10 billion would increase its foreign liability and reduce its net foreign asset position by that amount.

In addition to the current account position, valuation and exchange rate changes should be taken into account to get a true picture of the NFA position. For example, foreign governments hold trillions of dollars in U.S. government bonds. If interest rates rise and U.S. government bonds decline in price, this would have the effect of reducing the overall value of these nations’ U.S. government bond holdings, and therefore of their net foreign assets.

Exchange rate fluctuations can also have a significant effect on the NFA position. Appreciation of a nation’s currency against that of other nations will decrease the value of both foreign-currency denominated assets and liabilities, while depreciation will increase the value of these overseas assets and liabilities. Thus, if the nation is a net debtor, currency depreciation will increase its foreign-currency debt burden.

But the NFA position itself can drive changes in exchange rates, since chronic current account deficits can prove unsustainable over time. Currencies of nations with a significantly negative NFA position and growing current account deficits can come under attack from currency speculators who may seek to drive it lower.

RELATED TERMS
  1. National Futures Association - ...

    The independent self-regulatory organization for the U.S. futures ...
  2. Current Account

    The difference between a nation’s savings and its investment. ...
  3. NFA Compliance Rule 2-43b

    A 2009 rule implemented by the U.S. forex industry's self-regulatory ...
  4. Foreign Exchange Reserves

    Foreign exchange reserves are reserve assets held by a central ...
  5. Translation Risk

    The exchange rate risk associated with companies that deal in ...
  6. Translation Exposure

    The risk that a company's equities, assets, liabilities or income ...
Related Articles
  1. Markets

    The National Futures Association As Market Watchdog

    As the overseer of the commodities and futures industry, the NFA helps to protect investors from fraudulent futures activities.
  2. Investing

    Explaining Foreign Exchange Risk

    Foreign exchange risk is the chance that an investment’s value will decrease due to changes in currency exchange rates.
  3. ETFs & Mutual Funds

    Protect Your Foreign Investments From Currency Risk

    Hedging against currency risk can add a level of safety to your offshore investments.
  4. Trading

    Is Your FX Broker In Compliance?

    Sharon Pendleton, director of compliance, National Futures Association (NFA), discusses some of the new rules that now govern forex brokers or dealers.
  5. Personal Finance

    Should You Open A Foreign Savings Account?

    Would opening a savings account in a foreign bank make sense for you? The pros and cons, how to establish one – and alternatives to consider.
  6. Markets

    This Central Bank Owns U.S. Equities Worth 20% of GDP

    Discover more about Swiss National Bank's holdings of financial assets, and look into its recent accumulation of foreign equities.
  7. Trading

    6 Factors That Influence Exchange Rates

    An in depth look at out how a currency's relative value reflects a country's economic health and impacts your investment returns.
  8. Personal Finance

    Tax Implications of Opening a Foreign Bank Account

    Learn about the tax implications of opening a foreign bank account, including accounts that generate earned or unearned income from overseas activity.
  9. Personal Finance

    Current Account Deficits: Government Investment Or Irresponsibility?

    Deficit can be a sign of trouble for some countries, and of health for others. Find out what it means when more funds are exiting than entering a nation.
  10. Investing

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
RELATED FAQS
  1. Customer account records of NFA members must be kept for ...

    Free info on financial certification exams including study guides, exam questions, and much more! Read Answer >>
  2. What is the difference between a nation's current account deficit and its currency ...

    Learn the respective meanings of the two terms, current account deficit and currency valuation, and understand the relationship ... Read Answer >>
  3. How can I invest in a foreign exchange market?

    The foreign exchange market, also called the currency market or forex (FX), is the world's largest financial market, accounting ... Read Answer >>
  4. Is a current account deficit good or bad for the economy?

    Take a deeper look at the nature of a country's current account balance, and see why trade deficits are neither good nor ... Read Answer >>
  5. What are the components of a financial account?

    Understand what the financial account is and how it relates to a country's balance of payments. Learn about the components ... Read Answer >>
  6. What are some examples of a Foreign Institutional Investor (FII)?

    Discover some examples of foreign institutional investors, and learn information about the nature of foreign institutional ... Read Answer >>
Hot Definitions
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  2. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  3. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  4. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  5. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
  6. Real Rate Of Return

    The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other ...
Trading Center