What it means
The IMF created the Special Drawing Right in 1969 to add to the reserves that countries could use in a crisis. It is not a currency that people can spend, and it is not held by companies or individuals.
Only member countries and certain approved institutions hold it, and countries can swap it for usable currencies. The value of an SDR rests on a basket of currencies.
The basket includes the US dollar, the euro, the Chinese renminbi, the Japanese yen and the British pound, with weights reviewed periodically by the IMF. Because the SDR is a blend, its value is steadier than that of any single currency in the basket.
The IMF uses the SDR as its unit of account, which means that loans, quotas and charges are all measured in SDRs. When a member country borrows from the IMF, the amount is stated in SDRs and converted to dollars at the prevailing rate.
The IMF publishes the daily rate for SDRs in US dollars. Businesses mostly meet the SDR in contracts.
Some international conventions, such as those covering shipping and aviation liability, limit compensation in SDRs so that the limit does not depend on one currency. A company reading such a clause must convert the limit into dollars at the relevant date.
There is a separate everyday meaning in sales organisations. A sales development representative, or SDR, is a junior salesperson who finds and qualifies leads before passing them to an account executive.
Context almost always makes clear which meaning is intended. Anyone quoting an SDR value in a contract should specify the date and the source of the exchange rate, because the figure moves every day.
Without that detail, two parties can reach different dollar amounts from the same SDR figure.
In practice
Real-world examples.
Example
A country faces a shortage of foreign currency and exchanges part of its SDR holdings for dollars to pay for essential imports. The swap is voluntary, and another member country agrees to take the SDRs. The transaction is arranged through the IMF's system, and the country's reserves of usable currency rise as a result.
Example
A shipping company reads a contract that limits cargo liability to a stated amount per kilogram in SDRs. Its finance team converts the limit into dollars at the rate on the date of the claim. The team documents the source of the rate in the claim file for the insurers.
Example
A software firm hires a sales development representative to contact potential customers by phone and email. The SDR books meetings and hands qualified leads to the account executives. Performance is tracked by the number of meetings booked each month.
Formula
Calculation
Dollar Value of an SDR Amount = Amount in SDRs x US Dollars per SDR
Worked example using an illustrative rate of $1.35 per SDR, which is not a current quote. A shipping liability limit is 10,000,000 SDRs.
Dollar Value = 10,000,000 x $1.35 = $13,500,000
If the rate moved to $1.40 per SDR, the same limit would be worth 10,000,000 x $1.40 = $14,000,000, a difference of $500,000 caused purely by the exchange rate.Case study
Seen in the real world.
Tidewater Freight is an illustrative, fictional shipping line whose standard contract limited liability for lost cargo to a set number of SDRs per package. A customer claimed for a damaged shipment and argued about the dollar value of the limit.
The finance director checked the IMF's published rate for the date of the incident and converted the limit into $27,000. The customer's lawyer had used a different date and a different rate, which gave $29,000.
The dispute was settled quickly once both sides agreed to use the official rate on the relevant date. The episode cost only a few days of correspondence, but it showed how a small gap in drafting can create a $2,000 argument. In this illustrative story Tidewater changed its contracts to state the date and source of conversion explicitly.
Watch out
Common mistakes.
- Treating the SDR as a currency that companies or individuals can hold or spend.
- Converting an SDR amount using a rate from the wrong date or an unofficial source.
- Confusing the IMF's SDR with a sales development representative, which shares the abbreviation.
Questions
People also ask.
Who creates SDRs?
The IMF allocates them to its member countries in proportion to their quotas.
What backs the value of an SDR?
It is not backed by a physical asset, and its value reflects a weighted basket of major currencies, with the weights reviewed periodically by the IMF.
Why do contracts use SDRs?
A basket-based unit avoids reliance on one currency and keeps limits more stable than a single currency would.
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