How can I book NDF successfully and run a successful eod on the booked NDF
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First, create a new subtype for NDF.
Map scheme details for the newly created subtype (ensure the deal type selected during scheme details creation is outright not ndf).
Now call up NDF dealcapture screen, and post the deal selecting the newly created subtype as the deal subtype.
When posting the deal, take note of fixing date and fixing method. These are two critical parameters for NDF deals.
A brief explanation of NDF
NDF meaning Non-deliverable Forward is a form of FX transaction where cash is not really exchanged for both currency (hence the name, non deliverable). The only exchange in NDF is the exchange of margin which acts as the PL realization.
A Chinese company enters into an NDF contract with an American company.
A Chinese company needs to secure $1,000,000. They don’t need this cash but a regulatory policy requires that a provision of $1,000,000 is made available for emergencies. There is almost a 100% chance there would be no emergency that would require touching this money but they want to be compliant with their regulatory. They need to secure a $1,000,000 emergency fund. But wait! they would be exposed to market risk if they just purchase such huge amount of USD for no pertinent reason. So they decide to do an NDF.
They contact an American company requesting for these funds but propose an NDF. This means they would buy the $1,000,000 at the current rate of USD/CNY, however, on a certain pre-determined date, the transaction would expire and they would exit the NDF contract on that pre-determined date. This exit is done by each party reselling the currencies to each other at a new rate. Now the difference between the new rate and old rate becomes the margin and is paid to the benefiting party. This act of reselling is otherwise known as fixing. Fixing usually happens 2 days to the value date of the NDF deal.
NDF: The Chinese company buys $1,000,000 but asks the seller not to deliver the funds. They agree the contract would run for some time then expires. Upon expiry, they would resell at a different rate.
NDF deal_num 100345:
Contract rate 7.12
Value_date: 15 OCT 2019
With this, the fixing date automatically becomes 13 OCT 2019. So on this date, they would close the contracting by reselling the currencies back to each other. But remember there was no exchange for the original deal so there won’t any exchange for the resell.
In FT, NDF deal capture window, you would find the FIXING DATE and FIXING METHODS.
Set the FIXING DATE as valuedate – 2.
Set the FIXING METHOD as either manual or automatic. For manual, a user with fixing privilege would have to callup the deal on the fixing date, specify the fixing rate and fix the deal. For auto, you would have to specify a reference rate for the system to use for the fixing.
Reference rates can be created via the MRS menu.
Hope this helps.
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