Meaning
Secondary currency exchange environment that operates outside the official government channels, often at rates determined by supply and demand. A parallel fx market typically emerges when the official exchange rate is artificial or when the government restricts access to foreign currency. It provides an alternative for businesses and individuals who cannot obtain the money they need through the formal banking system.
Although it may lack legal status, it often reflects the true economic value of the currency more accurately than the official price.
Price Discovery
Rates in this environment are highly volatile and react quickly to news about the economy or political changes. They represent the actual cost of importing goods when the central bank is short of reserves.
Sourcing Risk
Operating in this space involves legal and operational dangers for a manufacturing firm. Transactions may be difficult to document for accounting purposes and could lead to penalties if the activity is prohibited.
Economic Distortion
Existence of multiple exchange rates creates confusion in financial planning and makes it hard to set prices for products. It can lead to inflation as the high cost of parallel currency is passed on to consumers. Long-term dependence on this source of funding is unsustainable for a large production plant.
Managers must account for the premium paid in these markets when calculating the cost of production.
