What is a Blocked Currency?

by Investing School on June 10, 2011

Blocked currency, also referred to as “nonconvertible currency” is any currency which is used predominantly for domestic transaction. Such currency is not freely traded in a Forex market, primarily as a result of governmental restrictions. Currencies which are blocked are difficult, or even impossible, to covert into one that can be freely traded.

The Forex, or Foreign Exchange Market, is a market set up specifically for trading world currencies. For example, one might opt to purchase dollars or sell euros at such a market. Considered the most liquid of markets, Forex trading occurs over the counter. Most of the trading goes on between governments, banks and speculators.

Currencies are blocked for a variety of reasons. Some countries may limit conversion to prevent their citizens from investing in foreign markets or to prevent bad investment decisions. Another reason to prevent conversion is to combat high rates of inflation. Communist countries restrict conversion to “protect” their citizens from the influences of capitalism. Even with such restrictions in place, some blocked currencies continue to be traded on the black market.

Forex trading is frequently used in the context of hedging. This strategy is built around reducing the risk of investing by using a number of options as well as future contracts. Hedging can help an investor lock in profits, reducing the volatility seen in some portfolios, as the hedge may reduce the risk of loss. Hedging also reduces the potential for profit.

One of the countries best known for blocking its currency is China. This has caused some animosity on the global business stage.

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