The hot economies of major developing countries such as China,Brazil and India are all experiencing inflation, and their stilldeveloping banking systems and currency restrictions make itdifficult to use traditional methods to hedge that risk.

That situation is exacerbated in China by the appreciation ofthe renminbi, which has ramped up production costs in recent years,along with the country's rising wages. China's government appliescurrency controls that limit renminbi inflows and outflows, and soinhibit the use of traditional forward contracts that require thedelivery of the currency.

Non-deliverable forwards (NDFs) have become standard hedginginstruments for restricted currencies, because they do not requirethe delivery of currency. Instead, an international bank acts asthe counterparty, offsetting any foreign exchange losses or gainswith a net settlement in U.S. dollars.