On fixing date, the settlement payment of an NDF reflects the differential between the agreed forward rate and:

A Non-Deliverable Forward (NDF) is an over-the-counter financial derivative used primarily for trading currencies that are illiquid or subject to capital controls. Unlike standard forward contracts, NDFs do not involve the physical delivery of the underlying currencies upon maturity. Instead, on the agreed fixing date (typically one or two business days prior to the settlement date), a specified official fixing spot rate is observed from a recognized market benchmark (such as a central bank fixing or Reuters page). The cash settlement payment made on the settlement date is calculated based on the net difference between this observed fixing spot rate and the contracted NDF forward rate, multiplied by the agreed nominal amount.

Option A is incorrect because NDF settlement is determined by an official benchmark fixing rate, not the daily high rate of the currency.

Option B is incorrect because the fixing mechanism relies on a specific published fixing spot rate rather than an arithmetic average of the day's trades.

Option D is incorrect because NDFs settle against the spot rate on the fixing date, not an average rate computed over the entire contract period.

1. Emerging Markets Traders Association (EMTA), Standard Documentation for Non-Deliverable Forward FX Transactions, EMTA Practice Guidelines, 2018.

2. ACI Financial Markets Association, ACI Dealing Certificate Study Guide, Foreign Exchange Derivatives - NDFs, 2020.