The SDR stands for Special Drawing Rights and is a unit of account issued by the International Monetary Fund (IMF).
The IMF allocates SDRs to its member countries which is largely based on their share of the global economy. The value of an SDR is calculated using 5 international currencies: US Dollar, Euro, Pound Sterling, Japanese Yen, and Chinese Renminbi. In Summary – Countries are loaned money by the IMF not in dollars but in SDRs. The value of an SDR is calculated from the 5 major international currencies below.
Advantages of special drawing rights
If a country purchases SDRs and its holdings rise above its allocation, it earns interest on the excess. A country can exchange its SDRs back to hard currency such as the Yen, Euro, USD, Pound, or Renminbi by trading them with other countries.
Limitations of special drawing rights
SDRs cannot be used to purchase goods and services directly but countries can exchange them among themselves. There are no notes or coins denominated in SDRs.
If a country sells SDRs and holds fewer SDRs than originally allocated, it pays interest on the shortfall.
Special Drawing Rights Value
The value of the SDR is based on a basket of five major currencies: the U.S. dollar, euro, the Japanese yen, pound sterling and Chinese Renminbi.
Historically, the value of the SDR was defined as the equivalent to 0.888671 grams of fine gold (which was equivalent to one U.S. dollar). After the collapse of the Bretton Woods system in 1973, the SDR was redefined as a basket of currencies.
UPDATE – As of October 1, 2016, the Chinese Renminbi was included as the fifth currency along with the U.S. dollar, euro, Japanese yen, and pound sterling, in the SDR basket.
How is the SDR calculated?
The SDR is calculated using the sum of specific amounts of each basket currency valued in U.S. dollars, as per the exchange rates quoted at noon each day in the London market. The value of the SDR (in U.S. dollar terms) is determined daily and is available on the IMF’s website.
The respective weights of each currency included in the SDR basket:
|U.S. Dollar 41.73%||Euro 30.93%||Chinese Renminbi 10.92%||Japanese Yen 8.33%||Pound Sterling 8.09%|
These weights are used to determine the amounts of each of the five currencies included in the new SDR valuation basket from 1 October 2016.