Fungible

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"Fungibility" refers to the ability of something to be exchanged for something different of equal value. An asset is "fungible" if it can be traded for something different, yet equivalent in value. One example of this is using fiat currency to purchase something from a retailer - when you pay for something at a store, you receive something, such as a sweater, in exchange for the amount of money at which that sweater is valued. You can do so because both the sweater and the money you use to buy it are fungible.[1][2]

Many diverse types of assets are considered to be fungible. For example, many stocks, security options and index options listed on more than one securities-related exchange are considered fungible because you can buy/sell on one exchange and offset on another exchange. This is possible because their contract specifications are identical and because all options are cleared through one clearing organization, The Options Clearing Corporation. So, for example, IBM options are traded on all six U.S. options exchanges. Thus, the options position could be initiated on the International Securities Exchange and offset on one of the other six options exchanges.

However, futures markets currently are different. If two markets offer Japanese yen futures, for example, there is no guarantee that their contract specifications will be identical. Contract size could be different, minimum price fluctuation or method of quoting could vary, etc. Even if they were identical, however, because they do not clear trades in one central location as with equity options, a futures contract transaction initiated at one futures exchange typically cannot be offset at another futures exchange.

References

  1. fungible - adjective. Merriam-Webster Dictionary.
  2. Definition - fungible. Business Dictionary.

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