NDF vs. CFD

Difference Between NDF and CFD

NDF and CFDs are financial tools that are used in financial markets in many parts of the world, especially the markets of Forex, brokers and investors to book profits on transactions and protect the financial risk that is common in financial markets. Both help in minimizing the exposure to risk created by fluctuations in the prices of items and foreign currency. There are many similarities in these two tools, but there are also differences that need to be shown.

NDF

NDF is known as non deliverable forward and has a future contract on a currency that is not heavily traded and is not convertible. The gain or loss on transaction is determined on the basis of the difference in the price of the currency set on the time of settlement and the rate is agreed upon by the seller and buyer at the time when the transaction is carried out. NDF has a period of time as it is agreed on a date, and is completed at the settlement date. These NDF’S normally have a period of one month, but NDF’s that are longer with the period of one year are also common.

The prices of NDF are in U.S. dollars and have now become a very popular instrument for companies to protect themselves because they are used to minimize the exposure to risk in dealing with foreign exchange sales who do not have many takers.

CFD

CFD is also called a contract for differences. This is a contract between a seller and a buyer. The buyer promises to pay the difference between the value of asset at the time when the contract is being conducted and the current value at a future date. If this difference turns out to be negative (which happens when the expectation of buyers goes wrong), it is the seller who pays the difference in value.

Thus the CFD’S are in fact derivatives that allow investors to gain the advantage of moving prices and provide a tool to speculate in financial markets.

 

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