Some countries limit who may hold or move their currency, so an ordinary fx-forward is impossible for a foreign investor. NDFs solve it by settling the profit or loss in a convertible currency, usually dollars, against a published fixing rate. Common NDF currencies include the Korean won, Indian rupee, Taiwan dollar, Brazilian real and Chinese yuan traded offshore.
The instrument is a direct consequence of capital-controls, and the offshore NDF rate can diverge from the onshore rate when pressure builds.
Example: an investor buys USD 10,000,000 against Korean won one month out at 1,350. The fixing prints 1,380. Settlement = 10,000,000 x (1,380 - 1,350) / 1,380 = $217,391 paid to the investor, in dollars, with no won involved.
Related: fx-forward