DEFINITION of 'Fungibles'

Fungibles refer to goods, securities, or instruments that are equivalent and, therefore, interchangeable. In other words, they are goods that consist of many identical parts which can be easily replaced by other, identical goods. If the goods are sold by weight or number, this is a good sign that they are fungible.

BREAKING DOWN 'Fungibles'

Commodities, common shares, options, and dollar bills are examples of fungibles. A commodity must be fungible before it can be traded on a commodity exchange. Specific grades of commodities, such as No. 2 yellow corn, are fungible because it does not matter where the corn was grown; all corn designated as No. 2 yellow corn is worth the same amount. Cross-listed stocks are also considered fungible because it does not matter if you purchased a share of IBM in the United States through the New York Stock Exchange (NYSE) or purchased a share in the United Kingdom through the London Stock Exchange (LSE); the stock should be accepted at either location as IBM stock. Fungibility of listed options makes it possible for buyers and sellers to close out their positions by taking offsetting positions. If you buy a call option, you can close out the position by selling (writing) a put option with the same underlying asset, expiration date, and strike price.

Assets like diamonds, land, or baseball cards are not considered fungible because each unit has unique qualities that add or subtract value. For instance, individual diamonds are unique gems with different cuts, colors, sizes, and grades. Diamonds are, therefore, not interchangeable and, thus, cannot be referred to as fungible. However, there may be a thin line between fungibility and non-fungibility. Though gold is generally considered fungible since one gold ounce is equivalent to another gold ounce, in certain cases, the precious metal is not considered fungible. The Federal Reserve Bank of New York offers gold custody services to central banks and governments around the world by storing gold bars in its basement floor underground vault. All of the gold bars deposited into the vault are weighed with precision, and the refiner and purity markings on the individual bars are inspected to confirm they match the depositor instruction sheets. All of this is carefully monitored and recorded, and since the exact bars deposited to the New York Fed are the exact ones returned upon withdrawal, the types of gold deposits are not considered fungible.

Two manufactured goods that are considered fungible must be treated as commodities and must compete only on the basis of price and/or availability.

The term ‘fungible’ should not be replaced with barter or liquidity. A good traded by barter is not necessarily equivalent to the exchanged commodity in units. In other words, commodities of different or incomparable value may be traded by barter. A good is said to be liquid if it can be easily exchanged for money or another good due to adequate demand and supply for the good. A fungible product is not necessarily a liquid one.

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