Non-Convertible Currency
Tue, Apr 15A non-convertible currency, often referred to as a “blocked currency,” is the official money of a nation that is not available for trading on the international foreign exchange market, typically due to government regulations.
This type of currency serves as a protective measure, as the economy associated with a non-convertible currency is generally more susceptible to market fluctuations.
Significant fluctuations in the value of a non-convertible currency can have severe negative consequences for a country.
One of the main concerns for governments that leads to restricting currency convertibility is the fear of capital flight.
The only means of trading a non-convertible currency is through the black market.
Examples of non-convertible currencies include the Brazilian real and the Chilean peso, which pose significant challenges for businesses operating in Brazil and Chile.
Non-convertible currencies are often considered exotic but possess distinct characteristics.
To conduct business in such countries, companies utilize a financial instrument known as a “non-deliverable forward contract” (NDF).
NDFs are the primary method for hedging local currency risks in emerging markets that utilize a non-convertible currency.
It is important to note that a non-deliverable currency cannot be taken out of the country where it is issued.
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