FX Convertibility Risk and Currency Transfer Risk

Summary

The document distinguishes convertibility risk from the broader idea of foreign exchange markets stopping. Convertibility risk arises when a government legally bars conversion of its currency into another currency, creating a cross-border exposure for institutions holding cash or using products that require physical currency exchange. The answer cites Malaysia and Thailand in 1998 as examples and notes that South Korea and Ukraine considered such restrictions without implementing them.

The practical distinction depends on settlement: non-deliverable forwards avoid the risk of having to exchange currencies, while products requiring physical delivery may retain it. The answer also separates convertibility risk from transfer risk, which concerns a government preventing assets from being repatriated regardless of the currency. These examples are brief and historical; the document does not provide a quantitative model, likelihood estimates, or a full account of product-specific exposures.

Key ideas

• Convertibility risk concerns a government legally blocking exchange between currencies.
• Non-deliverable contracts avoid the need to physically exchange currencies and therefore avoid this specific exposure.
• Products involving physical currency may carry convertibility risk.
• Transfer risk concerns restrictions on moving assets out of a jurisdiction, irrespective of currency.

Tags

# FX convertability modelling: have FX markets ever closed down?


# FX convertability modelling: have FX markets ever closed down?












I am working on modelling the risk that a bank's cash in one currency could not be converted into another currencies. This convertability risk has liquidity implacations for the asset liabilities management of the bank.

## Answer by Dimitri Vulis (score 1)

https://quant.stackexchange.com/a/57248

A "convertibility event" is not "FX markets closing down" but a cross-border risk event when a government decrees that its currency cannot be legally converted to another currency.

As 8 recall, Malaysia and Thailand did it in 1998; and South Korea and Ukraine seriously discussed it in later years, but never actually did.

A non-delivery contract (an NDF or embedded in another product) has no convertibility risk. Most other products involving physical currency do.

Do not confuse convertibility with transfer ability risk - another cross-border risk, when a government stops you from repatriating assets under its jurisdiction, irrespective of currency.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.