Why the ADB holds SDR instead of dollars or euros

Two questions that look like a pair and are not. The first is analytical and its answer is a piece of reasoning about currency risk; the second is a factual lookup whose correct answer changes over time and therefore has to be dated. Treating both as short answers is right, but treating them as the same kind of short answer is how these get marked down: students write two paragraphs of general commentary about the International Monetary Fund when the first question wants a mechanism and the second wants numbers with a source and a date attached. Answer them separately and under their own headings. There is no argument to build across them and nothing gained by an introduction that explains what the SDR is before the questions that assume you know. Two headings, two answers and nothing joining them is the shape a marker expects here, so resist the instinct to make it read like an essay.

The answer to the first question is sitting in the brief you were given, which is what makes it a good question and an easy one to miss. The Asian Development Bank **makes its loans in SDR**. Its assets are therefore denominated in a five-currency basket, and if it funded and held those assets in dollars it would be carrying an open position between the dollar and the other four constituents — a movement in the yen or sterling against the dollar would move the value of its loan book without moving its reserves. Holding SDR matches the currency composition of what it holds to the currency composition of what it is owed. That is currency matching, and it is a structural hedge rather than a trade, which is why the bank does not have to be right about exchange rates for it to work.

Two further reasons are worth one sentence each rather than a paragraph. A basket is less volatile than any of its constituents, because the cross-rate movements that dominate single-currency exposure partly offset inside it — so the SDR reduces variance in the value of the bank's resources without any forecasting. And there is an institutional reason the finance answer alone does not reach: the bank is owned by 67 members and its largest borrowers are India, Pakistan, China, Vietnam and Indonesia, none of whom transact primarily in the same currency. Denominating in any single national currency would give that issuer's monetary policy a privileged claim over every borrower's obligations. The SDR is the unit that belongs to no member in particular, which for a multilateral institution is a governance property and not merely a financial one.

The second question asks for the currency **amounts** in the basket, and the word matters. The SDR is defined as fixed quantities of each of the five currencies, and its daily value is the sum of those quantities converted at that day's market exchange rates. The percentage weights people usually quote are a consequence of the amounts, not the definition, and they drift continuously as cross-rates move — so a table of percentages answers a question you were not asked. The amounts are held fixed across a five-year valuation period and reset at each review, which means your answer needs a date and a citation to the IMF's own valuation page rather than a figure lifted from a textbook. The link in the assignment goes to exactly that page and it publishes the amounts daily.

One dating trap is built into the prompt itself, and noticing it will do you no harm. The passage quotes loan totals as of January 2014 while describing a basket of five currencies that includes the Chinese renminbi — but the renminbi only entered the basket in October 2016, so the two halves of the brief are from different eras. Do not copy the vintage the prompt implies. Report the amounts currently in force, state the date they became effective, and if you want a sentence of context note that the composition itself is revised, which is a live illustration of why the answer needs a date. That also protects you if the paper is marked after the next review, since a dated answer stays correct while an undated one silently stops being true.