Last Updated on: 9th February 2021, 01:49 pm
A non-convertible currency, also known as a “blocked currency”, is the legal tender of a country that is not traded at all on the international foreign exchange market, usually because of government restrictions.
It is normally a method of protection as a non-convertible currency’s economy is usually particularly vulnerable to market movements.
If the non-convertible currency decreases or increases sharply in value, its potential adverse effects could be devastating for a country.
A flight of capital is one of the principal fears of governments that leads to the blocking of currency convertibility.
The only way to trade a non-convertible currency is on the black market.
The Brazilian real and Chilean peso are two examples of non-convertibles which represent considerable challenges for businesses operating in Brazil and Chile.
Non-convertible currencies are very often exotic currencies but do have some different characteristics.
NDFs are the principal way to hedge local currency risks in emerging markets that operate with a non-convertible currency.
It is crucial, however, to highlight that the non-deliverable currency can never be removed from the country of its denomination.
Vincent Nyagaka is a Professional Trader, Analyst & Author. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Check out Vincent’s Professional Trading Course here.