MINICASE SDR EXCHANGE RISK The Asian Development Bank (ADB), a multilateral deve
ID: 349167 • Letter: M
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MINICASE SDR EXCHANGE RISK The Asian Development Bank (ADB), a multilateral develop- SDR basket., To learn more about the SDR basket, visit http-/l overty reduction, makes its loans in SDR. As of January d, these loans totaled $21o2 billion, with the largest bor- Questions y its 67 members whose primary goal is imforg/external/np/fin/data/rms.sdrvaspx. s being India, Pakistan, China, Vietnam, and Indonesia. rower The ADB covers the exposure of its capital resources by sell. ing into the forward market the currencies that make up the 1. Why would the ADB hold SDR instead of dollars or euro? 2. What are the currency amounts that make up the SDR?Explanation / Answer
SDR is a currency issued by IMF. It is used to supplement foreign exchange reserves dealing with international currencies. SDR comprises of four currencies namely British pounds, us dollar, yen and euro.
The main reason for ADB using SDR instead of dollar or euro is that these are internationally accepted denominations for international transactions. These came up when us dollar and euro became weak. The borrowers experienced exchange risks for repayment purposes and for disbursement of their loans.
The SDR practices were approved in late 2005 which made the currency practices stable, reduced the exchange transaction costs and thus reducing the mismatch between the multiple currencies.
The currencies included in the SDR basket are:
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