An NDF is a short-term, cash-settled currency forward between two counterparties.

On the contracted settlement date, the profit or loss is adjusted between the two counterparties based on the difference between the contracted NDF rate and the prevailing spot F rates on an agreed notional amount. !he features of an NDF include" Notional amount" !his is the #face value# of the NDF, which is agreed between the two counterparties. $t should again be noted that there is never any intention to e%change the notional amounts in the two currencies Fixing date" !his is the day and time whereby the comparison between the NDF rate and the prevailing spot rate is made or fi%ing date means the date the fi%ing rate is determined and the cash settlement amount is calculated. Settlement date &or delivery date'" !his is the day when the difference is paid or received. $t is usually one or two business days after the fi%ing date. Contracted NDF rate" the rate agreed on the transaction date, and is essentially the outright forward rate of the currencies dealt. Fixing rate = Fi%ing rate means the rate displayed on the agreed rate source at the agreed time on the fi%ing date. !he fi%ing rate is used to calculate the cash settlement amount. Or Prevailing spot rate &or fixing spot rate'" the rate on the fi%ing date usually provided by the central ban(, and commonly calculated by calling a number of dealers in the mar(et for a )uote at a specified time of day, and ta(ing the average. !he e%act method of determining the fi%ing rate is agreed when a trade is initiated.

Benefits Protection - An NDF provides you with protection against unfavourable e%change rate movements. * Coverage + NDFs are available for a wide range of currencies. * Managing is! + ,here e%change restrictions do not allow physical delivery of currency, NDFs provide a means of negating foreign e%change ris(. * Flexi"ility + !he maturity date and the contract amount can be tailored to meet your particular needs.

#ey is!s * Opportunity loss - -ou will not receive the benefit of favorable e%change rate movements. * $ariation % &arly 'ermination + -ou can vary or terminate an NDF early but there will be a cost if you do so. * Cooling Off Period + !here is no cooling off period. * Counterparty and operational ris! + ,estpac has performance obligations under an NDF. -ou need to form a judgment of our ability to meet those obligations. .ee the section titled /0ey 1is(s2 on page 3 and the section titled /4an $ terminate an NDF before maturity52 on page 6 for more information.

()at are t)e costs* !here are no up-front out of poc(et costs with an NDF. Once the non-deliverable currency, settlement currency and maturity date are nominated by you ,estpac will determine the contract rate. ,hen determining that rate ,estpac ta(es several factors into account + see /7ow does ,estpac determine my contract rate52 on page 8 for more information. ,hile there are no up-front costs with NDFs, ,estpac still derives a financial benefit by incorporating a margin into the contract rate. !his means that this rate will be different to the mar(et rate prevailing at that time. $n effect you pay for the NDF by accepting the contract rate )uoted by #ey Benefits Protection - NDFs provide you with protection against unfavourable foreign e%change movements between the time you enter into an NDF and the maturity date. !his can assist you in managing your foreign currency e%posures. -ou e%change the uncertainty of e%change rate fluctuations for the certainty of an agreed cash flow. Coverage - NDFs are available for a wide range of currencies. Managing is! - ,here e%change restrictions do not allow physical delivery of currency, NDFs provide a means of negating foreign e%change ris(. Flexi"ility - NDFs are fle%ible. !he maturity date and the contract amount can be tailored to meet your particular re)uirements

#ey is!s Opportunity loss - -ou will forego any benefit of a favourable e%change rate movement between the time you enter into an NDF and the maturity date. $ariation % &arly termination - 4ancellations or adjustments may result in a cost to you + see the sections titled /4an $ terminate an NDF before maturity52, /4an $ bring the maturity date forward52 and /4an $ e%tend the maturity date52 on page 6 for more information.

Cooling off period - !here is no cooling off period. Counterparty and operational ris! - As is the case with most financial mar(ets products we enter into, ,estpac has performance obligations under an NDF. $f we are unable to perform our obligations under your NDF, you may be e%posed to mar(et e%change rate fluctuations as if you had not entered into an NDF. Our ability to fulfil our obligations is lin(ed to our financial wellbeing and to the effectiveness of our internal systems, processes and procedures. !he first type of ris( &our financial wellbeing' is commonly referred to as credit or counterpartyris(. !he second type of ris( &the effectiveness of our internal systems, processes and procedures' is commonly referred to as operational ris(. -ou must ma(e your own assessment of our ability to meet our obligations. 7owever, as a regulated Australian ban( we are subject to prudential regulation which is intended to reduce the ris( of us failing to perform our obligations. Further information about ,estpac, including copies of our recent financial statements, is available on our website at www.westpac.com.au 9ecause an NDF is a cash-settled instrument, the notional amount is never e%changed. !he only e%change of cash flows is the difference between the NDF rate and the prevailing spot mar(et rate:that is determined on the fi%ing date and e%changed on the settlement date: applied to the notional, i.e. cash flow ; &NDF rate + spot rate' < notional. 4onse)uently, since NDF is a #non-cash#, off-balance-sheet item and since the principal sums do not move, NDF bears much lower counter-party ris(. NDFs are committed short-term instruments= both counterparties are committed and are obliged to honor the deal. Nevertheless, either counterparty can cancel an e%isting contract by entering into another offsetting deal at the prevailing mar(et rate

The notional amount is the face value of NDF which is agreed between the two counterparties. There is never any intention to exchange the two currencies principal amounts. Only the difference between the NDF rate and the spot market rate is settled on the due date. The settlement is always done in U D. To illustrate! On "#th $anuary %##&! '() )orporation sells *N+ ,- mn. NDF to . ()! / months forward for value! "" th 'pril %##& at the NDF rate of U D0*N+ ,-.##! in effect buying U D " mn. +ate fixing date is "#th 'pril %##&. On "# th 'pril %##&! 1the fixing date2! at "% noon *ndia time! both parties will compare the NDF rate with the prevailing U D0*N+ fixing rate as +(*3s U D0*N+ reference spot rate. *n case! the NDF rate and prevailing rate are e4ual! no payment needs to be paid by any of the parties. *n case! the prevailing rate on "#th 'pril #& is +s.-# per U D! +s!,- mn agreed for in NDF would fetch U D 5#####.1 ,- ### ### 0-#2. .ence the difference amount of U D will be paid by . () to '() )orpn on the settlement date! i.e. on "" th 'pr #&. T here is no movement of *N+ ,- mn.

*n the other scenario! if the prevailing rate is +s. ,# per U D! on "#th 'pril #&! +s.,mn agreed in NDF would fetch U D " "%- ###. .ence the difference amount of U D " %- ### will be paid by '() )orpn to . () on the settlement date! i.e. "".#,.#&. 'gain there would be no movement of *N+ ,- mn.

'() sell To . () 6-# ,-!###!###.## 0 ,7 "!###!###.## ,-!###!###.## 0-# 7 5##!###.## Diff "##!###.##

'() sell To . () 6,#

,-!###!###.## ,"!###!###.##

,-!###!###.## ,# "!"%-!###.## 1"%-!###.##2

The NDF therefore offers an alternative hedging tool for foreign investors with local currency exposure. *t can also be used as a speculative instrument to take positions offshore in the local currency. The participants in the NDF market comprise multinational corporations! portfolio investors! hedge funds! and proprietary foreign exchange accounts of commercial and investment banks. (oth hedging demand and speculative demand are present in NDF market. The main trading locations for NDF s are in .ongkong! ingapore! 8orea! Taiwan! Newyork! 9ondon and Tokyo. ingapore is the largest hub for trading 'sian NDF s. The ma:or centres for *N+; NDF are ingapore! .ongkong and 9ondon. ingapore is the most active *N+ NDF market. <enerally participants take position in the *N+ NDF market based on their view on where the *N+ spot would be after a certain time period in the on shore market 1 *ndian forex market2. =ntities who have access to both the markets take advantage of the arbitrage opportunities if available between both the markets. 'rbitrage opportunity is generally available between the *N+ NDF market and the on shore market. No authentic data is available on the daily average volumes in NDF market! but the *N+ > NDF market is estimated to be around U D "-# > %## mn per day.