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 NorthernSpring, 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
The term hedge ratio refers to a mathematical formula that compares the value of a hedge to the value of the position in an asset. Calculating and tracking hedge ratios allows investors to understand and control their exposure to the price volatility of various assets.
Moneyzine EditorSeptember 20th, 2023
The term hedge refers to a strategy that establishes a new position in an asset to protect the profitability of an existing position. While a hedge can be used to control risk, and lower a potential loss, that same hedge will also reduce potential gains.Moneyzine EditorJanuary 19th, 2024
The term gamma refers to the rate of change in delta for a one point change in the price of an underlying asset. An option's gamma is typically expressed in terms of a percentage change in delta for a one-point change in the underlying asset's price.Moneyzine EditorJanuary 19th, 2024
The term expiration Friday refers to the last business day an option can be sold, purchased, or exercised before it expires. Expiration Friday occurs each quarter, and is characterized by higher than normal price volatility and trading volumes.Moneyzine EditorNovember 6th, 2024
The term expiration date refers to the final day the holder of an option contract can exercise their right under the agreement. After the expiration date, the seller of an option can no longer be assigned.Moneyzine EditorNovember 6th, 2024
The term exercise by exception refers to the automatic exercise of in-the-money options at expiration. The Options Clearing Corporation (OCC) institutes exercise by exception unless explicit instructions prohibit exercising the option.Moneyzine EditorNovember 6th, 2024
The term European option refers to an agreement that can be exercised only on a specific day prior to its expiration date. Call or put options involving stock market indexes are typically European-style options.Moneyzine EditorNovember 6th, 2024
The term American option refers to an agreement that can be exercised at any time prior to, and including, its expiration date. Call or put options involving equities or common stock are typically American-style options.Moneyzine EditorNovember 6th, 2024
