Fungibility

Fungibility - Warsaw, The old town, Poland♥♥♥
Fungibility

In general terms fungibility refers to the capacity that an asset or good has to be replaced by another with equivalent or similar characteristics. In the case of goods or products, a good is usually considered fungible if it is not possible to distinguish between one unit of a particular commodity from another unit of the same commodity.

For example, the commodities of electricity, petroleum, or metals are normally considered to be highly fungible; similarly, fungibility can also be attributed to money. In the organized commodity futures markets, the goods that serve as underlying assets have to be homogeneous or fungible with one another.


To ensure this, minimum accepted standards are established, which the commodity must satisfy to be accepted as an underlying asset (this is known as basis grade). In addition, the futures (options) that are negotiated in a market and that have the same characteristics (the same underlying asset, the same delivery period or exercise date, the same size, etc.) can be considered as homogeneous or fungible with one another.

This makes it possible to eliminate the direct link between the buyer and the seller, which facilitates negotiation, as both types of investors can close out their positions before the delivery period (or exercise date) entering into an opposite trade to the original one.
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