Friday, July 19, 2024

Non-convertible currency

A Non-convertible currency , also known as a “blocked currency”, is the legal tender of a country that does not trade on the international foreign exchange market at all, usually due to government restrictions.

This is often a method of protection, as economies with non-convertible currencies are often particularly vulnerable to market fluctuations.

If the value of a non-convertible currency sharply depreciates or appreciates, the potential adverse effects could be devastating to a country.

Capital flight is one of the government’s major concerns, leading to disruptions in currency exchange.

The only way to trade non-convertible currencies is on the Black Market.

The Brazilian Real and the Chilean Peso are two examples of non-convertible currencies, which pose considerable challenges for businesses operating in Brazil and Chile.

Nonconvertible currencies are typically exotic currencies, but do have some different characteristics.

To conduct business in these countries, companies use a financial product called a Non-Deliverable Forward (NDF).

NDF is the primary way to hedge local currency risk in emerging markets using non-convertible currencies.

However, it must be emphasized that non-deliverable currency can never be transferred out of the country of its denomination.

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