What Is a Convertible Currency?
A convertible currency is any nation's legal tender that can be easily bought or sold on the foreign exchange market with little to no restrictions. A convertible currency is a highly liquid instrument as compared with currencies that are tightly controlled by a government's central bank or other regulating authority.
A convertible currency is often referred to as a hard currency.
Key Takeaways
- A convertible currency or hard currency is a currency that can be traded on forex markets with little to no restrictions.
- A convertible currency is a reliable store of value, meaning an investor will have no trouble buying and selling the currency.
- Some common fully convertible currencies include the U.S. dollar, Euro, Japanese Yen, and the British pound.
How a Convertible Currency Works
There are hundreds of fiat currencies around the world, however, some are more stable and liquid than others. Fully convertible currencies are those typically backed by nations that are economically and politically stable. For example, the most tradable currencies in the world are, in order, the U.S. dollar, the Euro, the Japanese Yen, and the British pound. Convertible currencies are useful to forex investors because they can be confident these currencies' prices are relatively stable in the short term.
The level of convertibility of a nation's currency is also an important concept in the field of international trade. For example, a company would much rather do business in a nation whose currency has a high level of convertibility so it can protect itself from paying unexpected fees or jumping through regulatory hoops. Dealing with a fully convertible currency allows companies to do business across borders with confidence and gives them access to transparent pricing. Also, a convertible currency is more liquid, which reduces volatility.
On the other hand, developing countries or those with more authoritative governments are more likely to place restrictions on the exchange of their currency with another. Currencies from these countries are typically less stable and may come from economies with high inflation rates. Non-convertible currencies are also more illiquid.
Types of Convertible Currencies
Fully Convertible
Perhaps because major fiat currencies are no longer tied to the gold standard, the popularity of foreign exchange trading has increased in recent years. However, for the most part, currencies such as the U.S., Canadian, and Australian dollar, along with the Japanese Yen, Euro, and British pound still account for the vast majority of trading.
One major advantage of the U.S. dollar is that central banks hold it as their main reserve. Furthermore, a number of asset classes are denominated in U.S. dollars, meaning payments and settlements are made in U.S. dollars.
Partially Convertible
Currencies such as the South Korean won and Chinese Yuan are known as partially convertible currencies. A partially convertible currency is the legal tender of a country that is traded in low volumes in the global foreign exchange market. The governments of these countries place capital controls that limit the amount of currency that can exit or enter the country.
Non-convertible
Nearly all countries have currencies that are at some level at least partially convertible. However, currencies such as the Brazilian real, Argentinian peso, and Chilean peso are considered non-convertible because it is virtually impossible to convert them into anotherlegal tender, except in limited amounts on theblack market.
Convertible Virtual Currency
The rise in popularity of cryptocurrencies in recent years has brought about yet another term: convertible virtual currency. This refers to digital currencies such as bitcoin, Ether, and Ripple, which are unregulated but can be used as a substitute for real and legally recognized currency even though they do not have the status of legal tender.
FAQs
A convertible currency or hard currency is a currency that can be traded on forex markets with little to no restrictions. A convertible currency is a reliable store of value, meaning an investor will have no trouble buying and selling the currency.
What are the different types of convertible currencies? ›
The three types are: fully convertible, in which a country's currency can easily be converted into gold or another currency; partially convertible, in which the currency can be traded but tends to be traded in low volumes; and non-convertible, in which it is almost impossible to convert the currency into another legal ...
What are the types of convertible virtual currency? ›
Bitcoin, ether, and XRP are examples of convertible virtual currencies.
What are the different types of currency? ›
One can classify currencies into three monetary systems: fiat money, commodity money, and representative money, depending on what guarantees a currency's value (the economy at large vs. the government's precious metal reserves).
What makes currency fully convertible? ›
A currency is said to be fully convertible if it fulfills one or more of the following three criteria about usability, exchangeability and market value: it can be used for all purposes without restrictions; it can be exchanged for another currency without limitations; It can be exchanged at a given exchange rate.
What are the different types of convertible loans? ›
Types of convertible loan notes
There are two types of CLN's: secured and unsecured. Unsecured CLN's tie the business itself, the owners, and the investors/creditors into what's called a loan note holder. The parties agree to the terms of the CLN and once signed, the cash is released to the business.
What are the 4 direct currencies? ›
Opinions differ slightly over a definitive list of major currencies, but most will include the traditional 'four majors' – EUR/USD, USD/JPY, GBP/USD and USD/CHF – as well as the three most-traded 'commodity currencies' against the US dollar, which are AUD/USD, USD/CAD and NZD/USD.
What is an example of a fully convertible currency? ›
Some common fully convertible currencies include the U.S. dollar, Euro, Japanese Yen, and the British pound.
How many types of CBDC are there? ›
Central bank digital currencies (CBDCs) come in two main forms: retail and wholesale. A retail CBDC is used by the general public, while a wholesale CBDC is used for transactions between banks and other financial institutions.
How many types of digital currency are there? ›
4 Types Of Digital Currency: Pros And Cons. Digital currency is rapidly gaining popularity in the world of finance and commerce. There are four main types of digital currency: Cryptocurrencies, CBDCs, Virtual Currencies, and Stablecoins.
American paper currency comes in seven denominations: $1, $2, $5, $10, $20, $50, and $100. The United States no longer issues bills in larger denominations, such as $500, $1,000, $5,000, and $10,000 bills. But they are still legal tender and may still be in circulation.
What is the strongest currency in the world? ›
The Kuwaiti Dinar is renowned as the strongest currency in the world. Introduced in 1961, it has maintained a commanding presence due to Kuwait's substantial oil reserves, which account for a significant portion of its economic output.
Which currency is not freely convertible? ›
A non-convertible currency is one that is used primarily for domestic transactions and is not openly traded in the forex (FX) market. This is usually the result of government restrictions, which prevent it from being exchanged for foreign currencies. A non-convertible currency is commonly known as a "blocked currency."
What is considered convertible virtual currency? ›
A digital asset that has an equivalent value in real currency, or acts as a substitute for real currency, is referred to as convertible virtual currency, for example, a cryptocurrency. It can be: Used to pay for goods and services.
What other currencies are considered convertible? ›
Freely convertible currency list
- Australian Dollar.
- Bahrain Dinar.
- Canadian Dollar.
- Danish Kroner.
- Euro.
- Hong Kong Dollar.
- Kenya Shilling.
- Kuwait Dinar.
American paper currency comes in seven denominations: $1, $2, $5, $10, $20, $50, and $100. The United States no longer issues bills in larger denominations, such as $500, $1,000, $5,000, and $10,000 bills.
What are examples of convertible securities? ›
A convertible security is an investment that can be changed from its initial form into another form. The most common types of convertible securities are convertible bonds and convertible preferred shares, which can be converted into common stock.
Which currencies are not fully convertible? ›
Some countries pass laws restricting the legal exchange rates of their currencies or requiring permits to exchange more than a certain amount. Some currencies, such as the North Korean won, the Transnistrian ruble, and the Cuban national peso, are officially nonconvertible and can only be exchanged on the black market.
What are the different types of cross currency swaps? ›
A cross-currency swap can involve both parties paying a fixed rate, both parties paying a floating rate, one party paying a floating rate while the other pays a fixed rate. Since these products are over-the-counter, they can be structured in any way the two parties want.
