This document discusses Special Drawing Rights (SDR) and Optimum Currency Areas (OCA). It defines SDR as an international reserve asset created by the IMF in 1969 used for balance of payments settlements. It explains that SDR was created to support the Bretton Woods system and is now valued as a basket of currencies. The document also outlines OCA theory and criteria for an optimal currency region, noting regions with openness, diverse production, mobile labor and homogeneous preferences are more suited for a single currency. It concludes benefits of an OCA include reduced costs and increased trade while costs include constrained monetary and fiscal policies.

1. Prepared by :
Prathmesh Shitole
Piyush Kumar Patidar
MBA (IB) 3rd Sem 2013-2015

2. Contents
Special Drawing Right (SDR)
 What is SDR?
 Why was SDR created?
 Uses of SDR
 SDR valuation
 SDR INTEREST rate
 Limitation of SDR
Optimum Currency Area (OCA)
 Theory of OCA
 Criteria of OCA
 BENEFITS & COST TO HAVE OCA

3. What is SDR?
 The SDR is an international reserve asset, created by the
IMF in 1969.
 SDRs are allocated to member countries in proportion to
their IMF quotas.
 Also called paper gold, as it is not backed by any currency
or precious metal.
 Used only among governments of member
countries and IMF for balance Of payments settlements.

4. Why was SDR created?
 To support the Bretton Woods fixed exchange rate
system.
 The dominant constituents of international reserves
are:
Government or central bank holdings of gold
Widely accepted foreign currencies (USD)
 Inadequacy of these two key reserve assets , led to
creation of a new international reserve asset under the
auspices of the IMF.

5. Uses of SDR
 For balance of payments settlements among the
members
 Used for transactions with fund for e.g.. By paying the
reserve tranche.
 SDR denominated bank deposits and loans have been
offered in private financial markets.

6. SDR Valuation
 The value of the SDR initially defined as
0.888671 grams of fine gold = one U.S. dollar.
 After the collapse of the Bretton Woods system in1973,
SDR was redefined as a basket of currencies
 Basket consists of:
Euro
Japanese yen
Pound sterling
U.S. dollar

7. SDR INTEREST RATE
 The SDR interest rate provides the basis for calculating:
 Interest charged to members on regular (non-
concessional)IMF loans
 Interest paid and charged to members on their SDR
holdings and charged on their SDR allocations.
 Interest paid to members on a portion of their quota
subscriptions.
 The SDR interest rate is determined weekly.
 Is based on a weighted average of representative interest
rates on short-term debt in the money markets of the
SDR basket currencies.

8. LIMITATION OF SDR
 Dollar centered system: It gives too much importance
to USD.
 Deficit of USD.

9. Optimum Currency Area (OCA)
 In Economics OCA also known as Optimal Currency
Region (OCR).
 Definition : is Geographical region in which it would
maximize economic efficiency to have entire region
share a single currency.
 The theory is used often to argue whether or not a
certain region is ready to become a currency union,
which is one the final step of economic integration.

10. Theory of OCA
 Was pioneered by economist Robert Mundell as
originator of the idea, but others point to earlier work
done in the area by Abba Lerner.
 Mundell stated “economic efficiency would be
maximized in a geographical region if the region all
shared a single currency”.

11. Criteria of OCA
 Openness
 Diverse production : wide range of products & similar
production structure
 Mobile Labor
 Homogeneity of preferences

12. BENEFITS & COST TO HAVE OCA
BENEFITS
 Reduce transaction costs
 Bargaining power
 More intra Trade
 Economies of scale
 Removal of foreign exchange risk
 Fixed exchange rate
COSTS
 Unitary monetary policy
 Constraint on national fiscal policy

13. Thank You!!