When a multinational corporation operates in an emerging economy with strict capital controls or a non-convertible currency (such as the Chinese Yuan or Brazilian Real), it cannot execute standard, physically settled forward contracts. Treasurers manage this exposure using Non-Deliverable Forwards (NDFs).

[Sign NDF Contract via Offshore Bank] ---> [Contract Term Reaches Maturity Date] ---> [Compare Fix Rate vs. Spot Rate]
                                                                                                  |
                                                                                                  v
[Settle Net Variance Loss/Gain in USD] <--- [No Physical Local Currency Exchanged] <--------------+

NDF contracts are executed offshore, outside the jurisdiction of the restricted currency’s central bank, and settle entirely in a freely convertible currency (typically the US Dollar). At maturity, the counterparties compare the pre-agreed contract rate against the official spot rate. The net valuation variance is paid as a single cash settlement, allowing the company to hedge its exchange rate risks without violating local capital control laws.