A non-deliverable swap converts reference-currency swap cash flows into a deliverable settlement currency instead of paying the reference currency.
A non-deliverable swap (NDS) is an over-the-counter interest-rate or cross-currency swap in which amounts linked to a reference currency are converted and settled in another, deliverable currency. The reference-currency notional is used to calculate cash flows but is not itself delivered under the non-deliverable terms.
An NDS can contain a series of payment periods. That distinguishes it from a Non-Deliverable Forward, which generally settles one future exchange-rate difference.
A typical transaction identifies:
At a payment date, the calculation agent determines the amount under each leg, applies any contractual netting, converts the relevant reference-currency amount, and produces a settlement-currency payment.
For a simple non-deliverable fixed-for-floating coupon period, first calculate the net amount in the reference currency:
If the FX fixing (Q) is stated as reference-currency units per one settlement-currency unit, the settlement amount is:
For an INR amount settled in USD, a fixing of 84.00 INR per USD requires division:
INR / (INR per USD) = USD
If the published fixing instead used USD per INR, the conversion operation would be different. The safest control is to write the units beside the number and confirm that they cancel to the settlement currency.
Consider a USD-settled non-deliverable interest-rate swap referencing an INR 100,000,000 notional for a 180-day period:
From the perspective of the party receiving floating and paying fixed:
INR net amount = INR 100,000,000 x (7.1% - 6.5%) x 180/365
INR net amount = INR 295,890.41
If the contract converts INR into USD by dividing by the USD/INR fixing:
USD settlement = INR 295,890.41 / 84.00 = approximately USD 3,522.50
This example isolates one net coupon period and ignores discounting, payment delays, fees, rounding, collateral, tax, and disruption terms. A real confirmation controls the rate definitions, sign, fixing source, conversion formula, and settlement amount.
Keep the positive INR 295,890.41 reference-currency amount unchanged and vary only the fixing:
| INR per USD fixing | USD receipt |
|---|---|
80.00 | USD 3,698.63 |
84.00 | USD 3,522.50 |
88.00 | USD 3,362.39 |
With this quotation direction, a higher INR-per-USD fixing produces a smaller USD receipt for the same positive INR amount. The direction reverses for a negative INR amount because the party would make, rather than receive, the USD settlement.
An NDS is normally analyzed across all payment periods, not from one coupon alone. Continue the example with three 180-day periods and assume each period uses the same INR 100 million notional and 6.50% fixed rate:
| Period | Floating fixing | Net INR amount | INR per USD fixing | USD settlement |
|---|---|---|---|---|
| 1 | 7.10% | +INR 295,890.41 | 84.00 | +USD 3,522.50 |
| 2 | 6.20% | -INR 147,945.21 | 85.00 | -USD 1,740.53 |
| 3 | 7.00% | +INR 246,575.34 | 86.00 | +USD 2,867.16 |
The undiscounted net of these three settlements is approximately USD 4,649.13 received. That total is not the swap’s value at inception or its realized profit. Payments occur on different dates, collateral and funding can create additional cash flows, and the swap can have a positive or negative termination value between settlements.
| Structure | Reference cash flows | Typical settlement |
|---|---|---|
| Non-deliverable interest-rate swap | Fixed versus floating amounts tied to one reference-currency notional | Net amount converted into a deliverable currency |
| Non-deliverable basis swap | Two floating benchmarks or tenors tied to a reference currency | Net spread amount converted into the settlement currency |
| Non-deliverable cross-currency swap | Cash flows linked to notionals or rates in different currencies | Reference-currency amounts converted rather than delivered |
The structure may include multiple coupon payments and potentially principal-related amounts. It should not be assumed to follow a one-period forward payoff.
| Instrument | Number of cash-flow periods | Is the reference currency delivered? | Main price or fixing |
|---|---|---|---|
| Non-deliverable swap | Usually multiple | Generally no under the non-deliverable leg | Interest benchmarks, FX fixing, spreads, and swap terms |
| Non-deliverable forward | Usually one settlement | No | Contracted forward rate versus fixing rate |
| Cross-Currency Swap | Usually multiple | Often yes for principal and coupons | Two currency curves, basis, and contract rates |
| Foreign Exchange Swap | Near and far principal exchanges | Yes | Near rate and swap points |
An NDS can be non-deliverable because of market convention, regulation, documentation, or operational design. Do not assume a currency is legally non-convertible in every transaction or jurisdiction merely because an offshore NDS market exists.
An NDF generally compares one contracted forward rate with one future fixing and cash-settles the difference. A non-deliverable interest-rate swap instead calculates recurring fixed and floating coupons before converting the applicable amount into the settlement currency.
Applying an NDF payoff formula to an NDS can omit:
The confirmation may also require gross calculation or separate conversion of amounts rather than the simple pre-conversion netting used in this article’s example.
An NDS can be used to:
The hedge may not match an onshore loan, bond, or operating exposure perfectly. Differences in benchmark, fixing source, reset date, notional, tenor, liquidity, and convertibility rules can create basis risk.
Suppose a contract produces a positive INR 10 million reference amount and converts it at 84.00 INR per USD. The USD settlement is:
INR 10,000,000 / 84.00 = USD 119,047.62
If the entity must then obtain INR to pay an underlying obligation but can convert those dollars at only 82.00 INR per USD, the proceeds buy:
USD 119,047.62 x 82.00 = INR 9,761,904.84
The entity is short approximately INR 238,095.16 before transaction costs. The difference arises because the contractual fixing and the rate actually available for converting the settlement proceeds are not the same. Market access restrictions can also prevent or delay conversion entirely.
This example does not imply that either rate is typical. It demonstrates why USD cash settlement and economic hedging of an INR obligation are separate steps.
Valuing an NDS may require:
A current spot rate alone is not enough. Future cash flows and conversion amounts depend on multiple curves and contractual definitions.
Once a reference-currency coupon and its conversion fixing are known, a simplified present value in the settlement currency is:
where (DF_{settle}) discounts from the payment date and the quotation (Q) is reference-currency units per settlement-currency unit.
Before the rate and FX fixings are known, both components may be uncertain. Valuation then requires projected floating rates, forward FX or an equivalent multi-currency framework, basis, discounting, and any modeled interaction between the reference rate and exchange rate. Substituting today’s floating rate and spot FX for every future payment is not a reliable valuation method.
For each payment period, a reviewer should be able to trace:
A spreadsheet that shows only a final USD amount is not sufficient evidence. The units and signs should be reproducible from the confirmation and independent source data.
The fixing source is central because it converts a non-delivered amount into the settlement currency. Review:
Two transactions referencing the same currency can settle differently if they use different fixings or fallback waterfalls.
If a fixing is unavailable, the economic outcome is not automatically the previous day’s rate or zero. The contract may specify an alternative source, postponed valuation, calculation-agent determination, or another disruption response. Operations teams should identify the fallback before the valuation date and avoid inventing a substitute after publication fails.
This article is for financial education only. Non-deliverable swaps can involve significant rate, currency, basis, fixing, counterparty, collateral, liquidity, model, operational, legal, regulatory, tax, and settlement risks. It does not provide individualized investment, derivatives, accounting, tax, legal, or hedging advice.