special drawing rights

Special Drawing Rights (SDRs)By Gopika Kondath 1512362 Nivedha Vaideeswaran 1512345

Contents

• IMF quick facts

• Definition

• Purpose

• Structure

• Pros & cons

• Trends

• Current rates and Valuation

• Top Stories

ITERNATIONAL MONETARY FUND (IMF)

The International Monetary fund (IMF) is an organization of 188 countries, created in 1945.

AIMS

Promote international monetary cooperation.

Facilitate the balanced growth of international trade.

Promote employment, sustainable economic growth.

Headquartered in Washington D.C, with 24 Directors at the Executive Board.

Definition

Special Drawing rights (SDR) are the monetary unit of the reserve assets of the International Monetary Fund (IMF). The unit was created in 1969 in support of the Bretton Woods system of fixed exchange rates to alleviate the shortage of U.S dollar and gold reserve in the expansion of international trade.

The SDR unit is defined as a weighted sum of contributions of four major currencies, re-evaluated and adjusted every five years, and computed daily in terms of the USD.

The currencies are-U.S. dollars ($), euro (€), pounds sterling (£), Japanese yen (¥).

Purpose

SDRs are used as a unit of account by the IMF and several other international organizations. A few countries peg their currencies against SDRs, and it is also used to denominate some private international financial instruments.

In the Euro Zone, the Euro is displacing the SDR as a basis to set values of various currencies, including the Latvian Lats.

SDRs were originally created to replace gold and silver in large international transactions and provide cost free alternative to member states for building reserves.

Structure of the SDR

The IMF is responsible for all transactions, i.e. the IMF acts as a broker.

2 types of SDR transactions:

(a) Voluntary : Transactions take place with a voluntary counterparty.

(b) Designation: In case no voluntary counterparty can be found, the IMF designates the counterparty.

2 Types of allocation:

• (a) General: Based on long term need to increase existing reserve assets.

• (b) Specific: ensure all members of IMF the relative same amount of SDRs, since countries join the IMF at different times.

Structure of SDRs (continued)

SDRs are equal to a basket of 4 currencies with fixed amounts, however due to changing FX rates the relative weightings change with last time.

If a country has more SDRs than allocated by the IMF it receives SDR interest from the IMF, and if a country has less SDRs than allocated by the IMF, it has to pay interest to the IMF.

No Bid/offer spread

IMF calculates SDR interest rates on an weekly basis.

Interest rates calculated on the basis of 3 months Eurepo, 3 months Japanese Treasury Discount Bills, 3 months UK treasury bills and 3 months U.S Treasury Bills.

Pros & Cons

PRO SDR

• Stable( due to basket of currencies, i.e. diversified reserves)

• No “exorbitant privilege” for the USA

• A way of developing countries (w/ weak currencies )

• Less risk for countries while lending

CONTRA SDR

• Liquidity

• Shifting the problem from the USD to the SDRs.

• Advantage of SDR over a diversified reserve basket.

• Contains only 4 currencies.

• Geopolitical risks

IMF voting power

Limited no. of currencies

Current Rates

The regularly updated rates of the SDR will be displayed on the IMF website.

Valuation

The valuation can be viewed on the IMF website.

Top Stories About The SDR

• IMF SDR review set to boost SSA demand for RMB products, hedging

• A positive outcome to this year's review by the International Monetary Fund (IMF) of the potential inclusion of the renminbi into its Special Drawing Rights (SDR) facility could give a boost to interest in the currency from sovereigns, supranationals and agencies (SSAs), say market participants. Meanwhile, the IMF review is progressing, with the multilateral busy gathering data on trading flows.

Top Stories (continued)

• Renminbi SDR inclusion still debated, but benefits could go both ways

• The inclusion of the renminbi in the International Monetary Fund's Special Drawing Rights (SDR) currency basket in the next SDR review later this year is by no means a foregone conclusion. But much progress has been made, according to participants at the Offshore RMB conference organised by market body Asifma this week in Hong Kong.

• RMB fits the bill for SDR inclusion, say analysts

• The International Monetary Fund (IMF) could give the RMB a much needed credibility boost this year by including it in its special drawing rights (SDR) facility.

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