Fungibility

Definition

The term fungibility refers to the interchangeability of assets due to standardization.  Trading and exchange of an asset is simplified if it possesses the characteristic of fungibility.

Explanation

If an asset possesses the characteristic of fungibility, it is thought to be interchangeable with other assets of the same type.  This characteristic facilitates the trading of these assets, since a buyer would be assured of the asset's value.  Generally, options that are listed on a national exchange are fungible, while over-the-counter options are not.

Standardization and grading are two of the keys to fungibility.  For example, it's possible to purchase futures and options on Chicago Soft Red Winter Wheat.  A full size contract involves 5,000 bushels of wheat.  The grade at par include No. 2 Soft Red Winter, No. 2 Hard Red Winter, No. 2 Dark Northern
Spring, and No. 2 Northern Spring.  It doesn't matter where the wheat is grown, if the quantity and grade is consistent with the specification, then its value is the same.

Related Terms

hedge, hedge ratio, gamma, expiration Friday, expiration date, exercise by exception, European option, American option