A currency that is fully convertible or freely convertible is a currency that does not have any government restriction during the currency exchange. Convertibility allows for the conversion of money into liquid cash. Examples include the US Dollar and the Euro. See also the full list of convertible currencies.
Currency convertibility is very important while taking part in international trade where different currencies are involved. Some countries pass legislation restricting their currencies from being exchanged. In such cases, it makes international trade very difficult. Controls on convertibility are means of monetary control by governments.
Advantages of freely convertible currencies
The ability to convert currency into different currencies offers the following benefits. Convertibility ensures integration of the world economy by easing the international trade. This is because there is an increase in capital flows between countries. It also provides high economic growth thereby ensuring improved living standards through trade. Convertibility encourages imports by increasing their profitability. Profitability increases because the foreign exchange rate is higher compared to the fixed exchange rate.
Convertibility also encourages import substitution. This happens because the currency exchange rate is usually higher compared to the fixed rates thereby making the prices of imports higher. This discourages imports thus making a country to rely on local production. It also encourages people to remit funds from abroad. Funds sent from overseas can be exchanged to the local currency easily. Finally, convertibility is a balancing mechanism. Over-valued exchange rate leads to a deficit in the balance of payment thereby making the currency to depreciate. It discourages imports by increasing their prices thereby encouraging exports. In the end, it ensures that there is a balance in both imports and exports.
Convertibility of capital account and current account
Convertibility through the capital account is possible through portfolio capital flow, direct investment flows and flows of borrowed cash. Convertibility of currency can either be through the capital account or current account. Current account convertibility, on the other hand, is whereby one can convert currency from one currency to another without any restriction or without seeking permission from the government. The current market prices determine convertibility.
List of convertible currencies
The following is a list of convertible currencies.
|NZD||New Zealand Dollar|
|SAR||Saudi Arabian Riyal|
|HKD||Hong Kong Dollar|
Non-deliverable forward is a strategy where different parties strike a deal to settle profit or losses by the use of foreign currencies for future contracts before a contract can expire. The difference between the price of the prevailing spot currency and the price agreed to be paid determines profit or loss. The currencies are crucial in foreign markets and foreign exchange.
The settlement should be done two days before the contract expires. The US dollars are often used in settling the agreed prices. International businesses that involve the use of non-convertible currencies use NDFs to trade. The NDF makes it possible for the investor to have a position in the currency in instances where the government does not allow exchanges. NDFs are traded over the counter since they do not have established markets.
List of nonconvertible currencies with an NDF market
List of NDF currencies
The following are nonconvertible currencies with an NDF market.
|PEN||Peruvian Nuevo sol|
|KRW||South Korean won|
Non-resident bank account
It is difficult to open a non-resident bank account in Europe due to the rigorous process involved. It involves a lot of documentation and checks on the credit background. Since the process of having a non-resident account is tiring expensive and time-consuming, people consider opening virtual bank accounts. There are virtual bank accounts for non-residents that allow one to receive payments and send payments to your local bank in your country.
- Currency Convertibility: Advantage, Benefits and Preconditions for Capital Account Convertibility. (2014, April 26). Retrieved May 8, 2019, from Your Article Library website: http://www.yourarticlelibrary.com/economics/foreign-exchange/currency-convertibility-advantage-benefits-and-preconditions-for-capital-account-convertibility/38177