Immunizing currency risk in international trade and finance: The development of a Sdr futures market

Krishnan Dandapani, Arun J. Prakash, Karen Duhala

Research output: Chapter in Book/Report/Conference proceedingChapter

Abstract

In international trade and finance the numéraire currency problem is yet to be resolved. The use of Special Drawing Rightsis increasing in international transactions. The valuation of Special Drawing Rights (SDRs) has remained an unsettled issue since their inception, and the techniques used for determining the value of SDRs have considerable impact upon developing countries. SDR valuation itself poses problems in international trade. The potential repercussions to the international monetary system of inducingsystematic and unanticipated wealth transfers compounds the problem. Consequently, in this chapter, we evaluate the role of SDRs asinternational money numéraire and the implications of their use in international transactions. We further identify the strategies for nations to neutralize the risk of SDRs fluctuating in international financial, currency and trade transactions. This leaves us to recommend the development of a futures-type market in SDRs. Because such a market would have speculative appeal for internationalcurrency traders, we believe it would be an economically viable venture for an established futures exchange.

Original languageEnglish (US)
Title of host publicationThe Global Structure of Financial Markets
Subtitle of host publicationAn Overview
PublisherTaylor and Francis
Pages220-233
Number of pages14
ISBN (Electronic)9781134779499
ISBN (Print)0415135494, 9780415135498
DOIs
StatePublished - Jan 1 2005

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance(all)
  • Business, Management and Accounting(all)

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