Non-Deliverable Swap - NDS
Definition of 'Non-Deliverable Swap - NDS'
A currency swap between major and minor currencies that is restricted or not convertible. A non-deliverable swap (NDS) is so-called because there is no delivery of the two currencies involved in the swap, unlike a typical currency swap where there is physical exchange of currency flows. Periodic settlement of an NDS is done on a cash basis, generally in U.S. dollars. The settlement value is based on the difference between the exchange rate specified in the swap contract and the spot rate, with one party paying the other the difference. A non-deliverable swap can be viewed as a series of non-deliverable forwards bundled together.
Investopedia explains 'Non-Deliverable Swap - NDS'
Multinational corporations use NDSs to mitigate the risk that they may not be allowed to repatriate profits because of currency controls. They also use NDSs to hedge the risk of abrupt devaluation or depreciation in a restricted currency with little liquidity, and to avoid the prohibitive cost of exchanging currencies in the local market. Financial institutions in nations with exchange restrictions use NDSs to hedge their foreign currency loan exposure.
The key variables in an NDS are:
On the second fixing date, assume the spot exchange rate is 6.5 to the U.S. dollar. In this case, because the spot exchange rate is worse than the contracted rate, LendEx will receive a net payment of $33,333 [calculated as (6.5 – 6.0) x 400,000 = 200,000 / 6 = $33,333].
This process continues until the final repayment date. A key point to note here is that because this is a non-deliverable swap, settlements between the counterparties are made in U.S. dollars, and not in Argentine pesos.