First of all, what is an NDF?
An Non-Deliverable Forward is a product used by investors to get exposure to another Emerging Market country’s currency without actually ever buying it.They are generally used for countries where the trade of FX is banned due to volatility.
The “Non-deliverable” part just means that the investor does not receive the currency at the end of the contract but gets paid the difference. For example, if an investor buys a Chile NDF to get ‘delivered’ forward (at some point in the future) Peso for a fixed exchange rate, if at the contract’s end the Peso at spot is weaker than this rate the investor will get paid the difference by the seller and if spot is stronger, then the investor has to pay the difference. So, the Chile Central bank scaling back their buy back program means they are no longer reducing supply (by buying them) of Chile NDF on the market, they did this to prevent speculative investors from manipulating the Chilean currency to their benefit during a volatile period.
Does this present a good opportunity to start investing in some Chilean assets? Discuss…