Difference Between CFD and NDF

CFD vs NDF

In the financial market, making money is as easy as losing it. Although there are only two end results, the number of ways to get there is difficult to count. CFD (Contract for Difference) and NDF (Non-Deliverable Forwards) are two instruments that let the money flow and is a couple of the many ways to make or lose money. The main difference between CFD and NDF is that NDF is purely monetary while CFD is not. A CFD may involve the exchange of commodities or services while NDF only involves the exchange of money.

Another notable difference between the two is the use of multiple currencies in an NDF but not necessarily in a CFD. In simplest terms, a NDF is basically two counterparts that are betting on the exchange rate of two currencies. When the NDF becomes due, the either party earns or losses depending on which direction the exchange rate moves.

In a CFD two parties agree to the purchase of goods at a set-upon price for a given period. If the price drops, the buyer actually lost money because he could have bought it as a lower price. If the price increased, the buyer makes money because he is buying it cheaper than the prevailing market price. CFDs can be used to take a gamble and earn money just like a NDF, but it can also be used to lower the risk that a company takes. A good example of this would be a company who constantly needs to purchase a certain commodity. With a CFD, that company is therefore insulated from sudden changes in the pricing of that commodity. It is quite similar to getting insurance on your car.

The last major difference between NDF and CFD is that the exchange of money is just notional in NDF but not in CFD. With CFD, money and goods actually change hands, but only the difference changes hands in a NDF. For example. Companies A and B create and NDF with USD and EUR with a notional amount of 100 million. At the end of the NDF, the exchange rate moves by 1%. The winning company then makes 1% of the notional amount for a total of 1 million. That is the total amount that moves and not the entire 100 million.

Summary:

1.NDF is purely monetary only while CFD isn’t
2.NDF involves multiple currencies while CFD doesn’t
3.NDF is notional while CFD isn’t

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