Nondeliverable Forwards: Can We Tell Where the Renminbi Is Headed?
Since the early 1990s, international banks have been offering non-deliverable 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 emerging market currency is headed. The exchange rates on NDFs, however, likely embody a substantial risk premium that interferes with forecasting accuracy.
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