Sunday, September 27, 2009

Special drawing rights

Several nations peg their currency's exchange rate to a basket of currencies assembled by the international monetary fund, known as the special drawing right (SDR). The SDR is an official international monetary reserve unit designed to settle international claims arising from transactions between the IMF, governments of member nations, central banks, and various international agencies. SDRs are really "book entries" on the ledgers of the IMF and are sometimes referred to as "paper gold" periodically, that organization will issue new SDRs and credit them to the international reserve accounts of member nations. To spend its SDRs, a nation simply requests the IMF to transfer some amount of SDRs from its own reserve account to the reserve account of another nation, usually one whose currency is widely accepted in the international markets. In return, the country asking for the transfer gets deposit balances denominated in the currency of the nation receiving the SDRs. These deposit balances may then be used to make international payments.
The value of SDRs today is based upon a basket of currencies representing the five IMF member nations with the largest volume of exports during the 1975-79 periods. These five countries are the United Stated, The Federal Republic of Germany, France, Japan, and the United Kingdom. In determining the current value of SDRs the currency of each of these five nations is weighted according to the value of their exports and currency holdings. In 1981 the weights applied to these five currencies in the SDR basket were: U.S. dollars, 42 percent; German marks, 19 percent: French francs, 13 percent; Japanese yen, 13 percent; and British pound sterling, 13 percent. Countries that peg their currency's value to the value of SDR basket include Burma, Guinea, Kenya, Vietnam, Zaire, and Zambia.

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