March 18, 2012

Fungibility And Standard Chartered IDRs - Update by Bhavikkshah

A term called "Fungibility" is used for these IDR's, now what does this means & how it relates to IDR/ADRS ?
The actual meaning of the word fungible is the ability to substitute one unit of a financial instrument for another unit of the same financial instrument. However, in trading, fungibility usually implies the ability to buy or sell the same financial instrument on a different market with the same end result.
Its a financial instrument (i.e. individual stock, futures contract, options contract, etc.) is considered fungible if it can be bought or sold on one market or exchange, and then sold or bought on another market or exchange.
For example, if one hundred shares of an individual stock can be bought on the NASDAQ in the US, and the same one hundred shares of the same individual stock can be sold on the London Stock Exchange in the UK, with the result being zero shares, the individual stock would be considered fungible. There are many fungible financial instruments, with most popular being individual stocks, some commodities (e.g. gold, silver, etc.), and currencies.

Fungible financial instruments are often used in arbitrage trades, because the difference in the price (the arbitrage part) often comes from a difference in location (the fungible part). For example, if the Euro to US Dollar exchange rate was 1.2500 in the US and 1.2505 in the UK, an arbitrage trader could buy Euros in the US, and then immediately sell Euros in the UK, making a profit of 0.0005 per Euro (or $5 per €10,000), because Euros are a fungible financial instrument. Similarly it implies to Stocks IDRs etc.




1 comment:

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