Special Drawing Rights (SDRs), also known as the paper gold, are a form of international reserves created by the International Monetary Fund (IMF) in 1969 to solve the problem of international liquidity. They are not paper notes or currency. They are international units of account in which the official account of the IMF are kept. Origin of Special Drawing Rights Special Drawing Rights were created through the First Amendment of the Fund Articles of Agreement in 1969 following persistent US deficits in balance of payments to solve the problem of liquidity. Until December 1971, an SDR was linked to 0.88867 gram of gold and was equivalent to US $1. With the break down of fixed parity system after 1973 when the US dollar and other major currencies were allowed to float, it was decided to stabilize the exchange value of the SDR. Accordingly, the value of SDR was calculated each Continue reading
International Financial Institutions
International Commodity Exchanges
Recent years have witnessed a steep rise in the creation of the commodity exchanges along with a consistent expansion of the existing ones. The United States, Japan, United Kingdom, Brazil, Australia, Singapore are homes to leading commodity futures exchanges in the world. Worlds Major Commodity Exchanges 1. The New York Mercantile Exchange (NYMEX) The New York Mercantile Exchange is the world’s biggest exchange for trading in physical commodity futures. It is the primary trading forum for energy products and precious metals. The Exchange has been in existence for 132 years and performs trades through two divisions, the NYMEX divisions, which deals in energy and platinum and the COMEX division which trades in all the other metals. A major contribution of the Exchange has been to develop and launch energy futures and options contract in 1978 to facilitate price transparency and risk management in this key market. Exchange has Continue reading
Offshore Banking
Origin of Offshore Banking The origin of offshore banking units can be traced to the growth of financial activity in tax havens. A “tax haven” is a place where non-residents can receive income or own assets without paying high taxes. Some such places are Bahamas, Bermuda, Hong Kong, the Netherlands, Panama and Switzerland. Some features of these tax havens are: Low rate or complete absence of income tax on foreign investment and income. High degree of economical and political stability and a political system, which directly or indirectly encourages and fosters business activity at the center. Strict and well enforced rules of banking secrecy. Absence of exchange control Availability of supporting infrastructure such as an efficient communications and transportation network. Presence of well developed legal system and professional accounting expertise. Investor’s confidence due to past credential. No incidence of violence or criminal activities. These features encourage various types of business Continue reading
The Benefits of a Single Currency System – Euro
The euro is the result of the most significant monetary reform in Europe since the Roman Empire. Although the euro can be seen simply as a mechanism for perfecting the Single European Market, facilitating free trade among the members of the Euro-zone, it is also regarded by its founders as a key part of the project of European political integration. The euro is administered by the European System of Central Banks (ESCB), composed of the European Central Bank (ECB) and the Euro-zone central banks operating in member states. The ECB (headquartered in Frankfurt am Main, Germany) has sole authority to set monetary policy; the other members of the ESCB participate in the printing, minting and distribution of notes and coins, and the operation of the Euro-zone payment system. The introduction of a single currency for many separate countries presents a number of advantages and disadvantages for the participating nations. 1. Continue reading
Significance of Balance of Payments (BoP) Data
Balance of payment records all economic transactions between a county and the rest of the countries around the world annually. The balance of payment is made up of two distinguished components respectively the current account, capital and financial accounts. Transactions such as exports and imports of goods and services, income and transfers are recorded in the current account. On the other hand transactions relating to portfolio and foreign direct investments are recorded on the capital and financial accounts. Balance of payment is an important indicator of the health of any country’s business as it reflects its international trade and investment performance. Hence, in the Balance of Payment, sources of funds are recorded as positive and uses of funds are recorded as negative. All things being equal Balance of Payment sums to zero with no overall surplus or deficit but if a country is importing more than its exports, then its Continue reading
External Commercial Borrowing (ECB)
External Commercial borrowing (ECB) refers to commercial loans availed by companies from non-resident lenders in the form of bank loans, buyers credit, suppliers credit, securitized instruments (e.g. floating rate notes and fixed rate bonds). A company is allowed to raise ECB from internationally recognized source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc. However, offers from unrecognized sources are not entertained. External Commercial Borrowings (ECBs) include bank loans, suppliers and buyers credits, fixed and floating rate bonds (without convertibility) and borrowings from private sector windows of multilateral Financial Institutions such as International Finance Corporation. In India, External Commercial Borrowings are being permitted by the Government for providing an additional source of funds to Indian corporate and PSUs for financing expansion of existing capacity and as well as for fresh investment, to augment the resources available domestically. ECBs can be used Continue reading