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Nondeliverable Forwards: Can We Tell Where the Renminbi Is Headed?

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Since the early 1990s, international banks have been offering nondeliverable forward (NDF) contracts to clients who need to hedge exposures in currencies of emerging-market economies. Many also use the exchange rate on these contracts as a best guess of where the emergingmarket currency is headed. The exchange rates on NDFs, however, likely embody a substantial risk premium that interferes with forecasting accuracy.

Since the early 1990s, international banks have been offering nondeliverable forward (NDF) contracts to clients who need to hedge exposures in currencies of emerging-market economies. Many also use the exchange rate on these contracts as a best guess of where the emergingmarket currency is headed. The exchange rates on NDFs, however, likely embody a substantial risk premium that interferes with forecasting accuracy.


Suggested citation: Higgins, Patrick, and Owen F. Humpage, 2005. "Nondeliverable Forwards: Can We Tell Where the Renminbi Is Headed?" Federal Reserve Bank of Cleveland, Economic Commentary, 09.01.2005.

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