DEFINITION of 'Convertible Currency'

A currency that can be readily bought or sold without government restrictions, in order to purchase another currency. A convertible currency is a liquid instrument when compared to currencies tightly controlled by a central bank or other regulating authority.

A convertible currency is often referred to a hard currency. 

BREAKING DOWN 'Convertible Currency'

Developing countries or those with more authoritative governments are more likely to place restrictions on the exchange of currencies. Currencies from these countries are typically less stable, and may come from economies with high inflation rates, and are more illiquid, which does not fit the definition of a convertible currency. 

Convertibility is important in international trade, it allows companies to do business across borders with confidence and transparent pricing. Also, a convertible currency is more liquid, which reduces volatility. 

The most convertible currency is the U.S. dollar. It is the most traded currency in the world, central banks hold the U.S. dollar as their main reserve, and a number of asset classes are denominated in U.S. dollars meaning payment and settlements are made in U.S. dollars. Currencies such as the South Korean won, and Chinese Yuan are deemed convertible, but on the lesser side, as the government places capital controls that limits the amount that can exit or enter the country.

Some socialist countries such as Cuba and North Korea even issue nonconvertible currency. 

RELATED TERMS
  1. Currency Convertibility

    Currency convertibility is the degree to which a country can ...
  2. Currency

    Currency is a generally accepted form of money, including coins ...
  3. Busted Convertible Security

    A busted convertible security is a convertible bond where the ...
  4. Convertible Bond

    A convertible bond is a bond that can be converted into a predetermined ...
  5. Cross Currency

    A cross currency is a currency rate that is quoted and transacted ...
  6. Transfer Risk

    Transfer risk is the threat a local currency cannot be converted ...
Related Articles
  1. Investing

    Convertible bonds: pros and cons for companies and investors

    Understand what effect convertible bonds have on investors and companies. Find out the advantages, disadvantages, and what the issue means from a corporate standpoint before buying in.
  2. Investing

    An Introduction to Convertible Bonds

    Getting caught up in all the details and intricacies of convertible bonds can make them appear more complex than they really are.
  3. Insights

    A Primer On Reserve Currencies

    For nearly a century, the U.S. dollar has served as the world's premier reserve currency, but the future is uncertain.
  4. Investing

    Can a Bond ETF Work in a Rising Rate Environment?

    The CWB Convertible Securities ETF could be the perfect solution for a rising rate environment.
  5. Trading

    Currency fluctuations: How they effect the economy

    Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. Read on for what effects these changes can have.
  6. Trading

    Top 5 Hardest-Hit Currencies

    The value of a country's currency is dependent on many factors that will cause it to fluctuate, relative to other world currencies.
  7. Trading

    Dollarization Explained

    Find out how fledgling economies can find some stability in their currency and attract foreign investment.
  8. Managing Wealth

    The Mandatory Convertible: A "Must Have" For Your Portfolio?

    Mandatory convertibles are a little understood security with some distinct advantages. Find out if they are right for you.
  9. Investing

    Introduction to Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  10. Trading

    6 top-traded currencies and why they're so popular

    Every currency has specific features that affect its underlying value and price movements in the forex market. Learn why these currencies are especially popular for trading.
RELATED FAQS
  1. Where Does Stock From Convertible Bonds Come From?

    Convertible bonds are considered a combination of debt and equity. Find out how a debt instrument converts into shares of ... Read Answer >>
  2. Do convertible bonds have voting rights?

    Convertible bonds usually have no voting rights until they are converted. Even after conversion, they may not be granted ... Read Answer >>
  3. Is there a world currency? If so, what is it?

    There is no such thing as a world currency. However, since World War II, the dominant or reserve currency of the world has ... Read Answer >>
  4. Why would a corporation issue convertible bonds?

    Discover how corporations issue convertible bonds to take advantage of much lower interest rates as a result of a conversion ... Read Answer >>
  5. Can Private Corporations Issue Convertible Bonds?

    Find out why a "private corporation" isn't suited to issue convertible bonds. Determine what prevents this move into a company's ... Read Answer >>
Trading Center