Walk me through exactly how an NDF settles at expiry with numbers.

Question

AcadiFi · Accepted Answer

Let's walk through a concrete scenario. Ferraz Commodities in Sao Paulo has a 200 million BRL payable to a Japanese supplier in 90 days (the supplier will eventually need USD, not BRL, so Ferraz wants to lock in its USD cost). Today the BRL/USD spot is 5.20 BRL per USD. Ferraz enters a 90-day NDF to buy USD / sell BRL at the contracted rate of 5.28. Notional: 200,000,000 BRL. At the contracted rate, Ferraz is notionally locked into paying 200M / 5.28 = 37,878,788 USD worth of value. At expiry, the market looks up the fixing rate published by the Brazilian Central Bank (PTAX). Two scenarios: Scenario 1 — BRL weakens to 5.45. At the fixing, 200M BRL is only worth 200M / 5.45 = 36,697,248 USD. Ferraz would have lost 1,181,540 USD if unhedged. The NDF compensates: counterparty pays Ferraz 1,181,540 USD. Scenario 2 — BRL strengthens to 5.10. Now 200M BRL would cost Ferraz's counterparty 200M / 5.10 = 39,215,686 USD at spot — more than the contracted 37,878,788 USD. Ferraz must pay the counterparty 1,336,898 USD. ```mermaid flowchart LR A[Fixing Date
PTAX rate] --> B{BRL weak?} B -->|Yes| C[Counterparty
pays Ferraz] B -->|No| D[Ferraz pays
counterparty] C --> E[Net USD
cash flow] D --> E ``` No BRL ever crosses borders. The USD settlement compensates Ferraz as if the hedge were deliverable, but complies with Brazilian capital rules.

Walk me through exactly how an NDF settles at expiry with numbers.

Master Level II with our CFA Course

Related Questions

Practice Questions