Hi All,If it can be assumed that the NPV of a forward is the PVrec/BaseCCY - PVpay/BaseCCY then the NPV is a combination of the long and short position. However, I was wondering with respect to a NPF only one side of the trade is deliverable, so how is the trade to be market-to-market on a daily basis? Should the two sides continue to be valued as per a vanilla forward date adjusted for the fixing date or should the trade be solely valued in the settlement curreny?Up until the maturity date of the trade the PV on both sides of the trade has unrealised P&L but on maturity the the realised P&L will be only in the settlement currency. With this in mind how should the currency positions be managed? Even though the non-deliverable side of the trade cannot be delivered is the non-deliverable currency position still considered a 'live' position, if so wouldn't this cause large positional swings when an NDF matures? Does anybody know what the standard accounting practice is for NDFs? Is the mtm reported in the settlement currency or in the two currencies involved in the forward?Thanks in advance,Robert.

Quick thoughts:The PV of the deliverable leg is easy. For the non-deliverable leg you would need to calibrate/boostrap the "implied interest curve" of the Non-deliverable currency based on quoted swap points (or outright forward quotes) from the respective NDF market. I.e. what is the hypothetical interest curve of the off-shore Non-deliverable currency that fully explains the forward quotes, given the interest curve of the settlement currency.Once you have the NDF curve, you need to select an interpolation methods for maturities that lie within any two points, i.e. piecewise linear forwards, linear interpolation, cubic etc. If the NDF doesn't trade rarely, I would use the latest reliable points for the curve and assume it's unchanged (roll-down) unless you have reason to believe it has moved.If the NDF doesn't trade at all and you have absolutely no information, I would calibrate the "implied non-deliverable currency yield" from the forward price you traded at originally and use that for PV purposes.You should probably never use on-shore interest rates in any discounting, unless you have evidence that someone is willing to trade at those levels off-shore as well (or potentially for hedge accounting purposes?)

In practise, most people just interpolate the forward points or interpolate the "points per day" (but if you want a bit more "accuracy", Ziggy's method to bootstrap the implied interest rate curve is more rigorous) then get the interpolated outright forward rate for the date of the NDF. Then convert the foreign currency notional into Dollars using that forward rate and sum that number with the Dollar notional. Then you just need to discount that balance using whatever USD discount curve is appropriate to you (this is generally believed to be the OIS - search the forum for more on this if you are interested) to get the MTM of the trade.

Thanks for your responses.If we assume that the curves are calibrate and interpolated correctly (a big assumption maybe) how should the PV of the trade be caputured? Should the mtm of the NDF be in the settlement currency througout the life of the trade or should the two legs be valued/marked to market in the respective currencies until the maturity of the trade when the final settlement occurs?For example, if we have a USDBRL NDF how is the currency position to be managed? While only USD is deliverable at maturity, until the NDF matures should the BRL be hedged and positioned as if it is deliverable until fixing occurs?With respect to a non-deliverable swap, should there be a distinction made between unrealised P&L and realised P&L, with the unrealised P&L being expressed in, say BRL, and the realised P&L portion being expessed in the deliverable currency, say USD?Thanks again.

Please find the MTM formula (USD based) and some charts attached.P&L is all unrealized until maturity.

Thanks MCarreira but I am okay on the valuation part of the NDF it is more a case of how one would should represent the mtm/NPV...is it more correct to view the NPV in the seperate currencies, i.e., PVrec - PVpay or a combined NPV in terms of the deliverable currency? So...For example, should a USDBRL NDF be valued as PVbrl and PVusd, or should the mtm and NPV of the NDF be done in USD as this is the deliverable currency?Thanks.

It should be done on your currency (USD), a combined NPV (this is your credit exposure after all).Delta can always be calculated within the general method of evaluating the portfolio with a bump on the fx rate.

Thanks.