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Jochen M. Schmittmann

price dislocations in currency forwards have real economic consequences. Hedging for corporates and investors could become prohibitively expensive. As a result, spillovers to other assets can occur. For example, when NDF pricing makes hedging currency risks stemming from local currency bond investments expensive, it can prompt foreign investors to sell bonds. Asian NDFs have been more volatile on average than corresponding onshore forwards over the period from 2013 to April 2020 ( Figure 8 ). However, the maximum realized volatility was lower in NDFs for the IDR

Jochen M. Schmittmann
Non-deliverable forward (NDF) markets in many Asian emerging market currencies are large, rapidly growing, and often exceed onshore markets in transaction volume. NDFs tend to price significant depreciation during market stress episodes including COVID-19. Spillovers from NDFs to onshore markets are a policymaker concern. Our analysis shows that influences tend to run both ways after controlling for differences in timezones between markets. For the COVID-19 pandemic there is some evidence of NDFs leading onshore markets for a few currencies. Policy approaches to NDFs vary widely across Asia from close integration with onshore markets to severe restrictions on NDF trading.
C. Emre Alper, Ms. Wenjie Chen, Mr. Jemma Dridi, Hervé Joly, and Mr. Fan Yang

(“offshore”). The other currency, usually a frontier or other emerging market economy currency with capital controls, is “nondeliverable.” Therefore, NDF prices reflect market expectations and supply and demand factors that cannot be fully manifested in onshore currency product prices in a country with capital controls. The pricing of NDF contracts, like most forward contracts, is primarily based on the CIP formula. At the settlement date of an NDF contract, if the settlement exchange rate, “the fixing rate”—generally the spot rate traded for the currency onshore

International Monetary Fund. African Dept.

liquidity of the foreign exchange market, J.P. Morgan and Barclay’s decided to remove Nigeria from their global indexes of domestic currency bond markets, which are widely tracked by non-resident investors. In June 2015, the CBN enacted a restriction on obtaining foreign exchange for outward portfolio investment by Nigerian residents. 14. Non-deliverable forward (NDF) prices are another indicator that can be used to assess the impact of administrative measures on capital flows . NDFs are foreign exchange derivatives in which a net payment in a convertible currency is

Mr. Emre Alper, Ms. Wenjie Chen, Mr. Jemma Dridi, Mr. Herve Joly, and Mr. Fan Yang
This paper assesses the extent of economic and financial integration among the East African Community (EAC) along a number of dimensions and, where possible, whether integration has increased in the wake of the major regional integration policy milestones.
Roberto Benelli

(NDF) prices. This is not the usual measure for testing or gauging the effectiveness of capital controls, but has some important advantages over alternative approaches. The usual tests for the effectiveness of capital controls are based on flows and movements in the exchange rate and reserves. These are useful but they suffer from the fact that the degree of the response cannot, in general, be used to infer the relative effectiveness of the measure. Forward or “basis” spreads, at least in principle, can be used to gauge the implied arbitrage costs that a particular

International Monetary Fund. Asia and Pacific Dept

See also Schmittmann and Han Teng (2020) for an analysis on NDF pricing and how the increased cost of hedging from local currency bond investments could prompt non-resident investors to sell bonds. During stress episodes, the authors document that, for Indonesia the implied yields in the onshore and offshore markets differed by around +/- 50 percent, registering the largest dispersion among peer Asian economies. 14 See also Ishi, Stone, and Yehoue (2009) who reference news reports suggesting that some Russian banks used the cheap Ruble liquidity to invest

International Monetary Fund. African Dept.
This paper discusses a few selected issues of the Nigerian economy—options and strategies for a fiscal rule for oil wealth management, enhancing the effectiveness of monetary policy, and recent developments and prospects of capital flow. Despite its diversified economy, Nigeria’s fiscal policy is heavily dependent on the oil sector. This paper explores options for a formalized rule-based approach to setting a “depoliticized” budget oil price. Two boom-and-bust episodes since early 2000 have highlighted the challenges in the current monetary policy framework. Nigeria has also been characterized by sizable capital outflows, which have diminished recently.