Implied Dividend Growth Rate
We are now aware of the various models that are used for equity valuation like Gordon model, H model, 2 stage model etc. in each of these models, we were assuming that the given inputs are dividend, dividend growth rates and time horizon, The output that we expected from these models was the current stock […]
Strategic Use of Land in Infrastructure Financing
A lot of developing countries do not have the finances required to build large scale infrastructure projects. However, these countries do have large parcels of lands in urban areas. There is a dire need for infrastructure projects in the developing world. Cities like Beijing, Mumbai, Karachi and Bangkok are bursting at their seams due to […]
How Corporate Taxes Impact Corporate Behaviour?
Corporate taxes form a significant portion of the expenses borne by multinational corporations. These corporations are almost obsessed with efficiency. They continuously try to reduce their expenses so that their profitability can be increased. This is the reason why these companies are very sensitive even to minor changes in the tax regime. In this article, […]
Dividend Discount Model: Gordon Growth Rate
In the previous article, we became aware that the value of a stock can be split into two parts. One part is the horizon period i.e. the period chosen by the analyst for which they believe they can accurately forecast the financials of the company and therefore its dividends. This part remains the same when […]
Causes for Cost Overruns in Infrastructure Projects
In the previous article, we explained the concept of cost overrun. We also explained how cost overruns have a negative effect on the finances of the entire project. However, it is strange that despite being so harmful to infrastructure projects, cost overruns are still ubiquitous. It is common for more than 50% of megaprojects to […]
Special Drawing Rights (SDRs) were a part of the monetary system that was created post World War-2 in the Bretton Woods arrangement. Since the United States had almost all of the gold reserves of the world at that time, the Special Drawing Rights (SDRs) were intended as a supra-national currency that could be used instead of gold, thereby reducing dependence on gold.
However, the idea of an abstract currency replacing gold has not caught up with the world till date. The Special Drawing Rights (SDRs) were virtually unheard of till the year 1968 and are still not very popular. The average person who is not connected to the Forex markets is not even aware of the existence of Special Drawing Rights (SDRs)!
The Special Drawing Rights (SDRs) are basically a combination (weighted average) of multiple currencies. This means that the International Monetary Fund (IMF) has its own reserve which has multiple currencies. Based on the value of these reserves, the IMF creates and distributes Special Drawing Rights (SDRs).
Each unit of Special Drawing Rights (SDRs) consists of 4 major currencies. The Special Drawing Rights (SDRs) derives 44% of its value from the United States Dollar, 34% from the Euro, 11% from the Japanese Yen and 11% from the Pound Sterling.
Since the Special Drawing Rights (SDRs) is nothing but a weighted average of multiple currencies, the interest rate due on the Special Drawing Rights (SDRs) is also nothing but a weighted average of all the currencies.
In the recent past, there have been rumors that countries like China and Russia are urging the International Monetary Fund to move away from the United States dollar based system. These rumors suggest that these countries propose that Special Drawing Rights (SDRs) become the de-facto reserve currency of the world.
One possible reason could be the fact that countries like China are fully aware of the fragile economic condition on which the United States economy stands. Also, China is forced to buy more and more United States treasury debt if it wants to keep its own economy afloat.
Hence, if an Special Drawing Rights (SDRs) based system was implemented, China and many other countries could exchange the excess dollars that they have with a basket of currencies. True, they would still end up with 44% dollars again! However, that would still be a better scenario than being 100% dependent on the United States economy as being a store of value.
Whether a Special Drawing Rights (SDRs) based system will replace the current dollar based system is yet to be known. However, there are some benefits if such a system does get implemented. The benefits are as follows:
The implementation of Special Drawing Rights (SDRs) in place of dollar based system will also lead to certain issues. Some of them have been mentioned below:
The fact that all other economic parameters are extremely sensitive to changes in money supply, this is a dangerous situation to be in.
Critics are of the opinion that it is highly unlikely that the Special Drawing Rights (SDRs) may ever replace the dollar. However, as a student of Foreign Exchange, it is essential that one knows that such a concept exists!
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