What is Fungibility?

Fungibility refers to the degree to which the components of an operation or product can be interchanged with similar components without decreasing the value of the operation or product. Often employed as a term to describe commodities, fungibility may also be used in a sociological context to be contrasted against patterns of mental accounting observed in behavioral finance studies. In a practical sense, this term may be used to describe the monetary value of a single dollar of US currency. Interchangeable in a variety of ways, this dollar may be replaced with four quarters, 20 nickles, or 100 pennies without losing value.

An important concept in commerce, fungibility of goods or services may be ranked by a business in order to facilitate its substitution should it become unavailable. Highly fungible goods, therefore, are relatively standardized. Examples of highly fungible goods can be found in many of the products sold in an auto parts store. For instance, if a car's windshield wiper fails, another similar product may be purchased to replace the defective product. By contrast, a non-fungible product is rare and specific in nature. An example of a non-fungible product is a genuinely-autographed letter by the English novelist Charles Dickens. Should this letter be burned in a fire, it is irreplaceable.

Practitioners of arbitrage may be interested in identifying the degree to which a range of securities are fungible. Highly fungible commodities usually bear a low degree of volatility. Less fungible items, on the other hand, are likely to express a less stable market value.

Even people can be treated as fungible components of an organization. For example, employees who can be reassigned from one department of a company to another may be viewed as highly fungible, whereas an employee whose position cannot be filled by anyone else within a company is considered non-fungible. In this way, a person's job security is closely related to his fungibility. If he is easily replaceable, he is probably also quite expendable, but if he is not very easy to replace, his employer may offer attractive incentives to keep him on board.

By evaluating the fungibility of goods or services, an investor or a corporation may be able to save considerable time, resources, or even money. Thus, the degree to which the investments of a corporation are fungible may determine the degree to which the corporation itself may be profitable.