Foreign Exchange Reserves

This section lays emphasis on the foreign exchange reserve. Foreign-exchange reserves (also called forex reserves or FX reserves) are assets held by central banks and monetary authorities, generally in dissimilar reserve currencies, typically the United States dollar, and to a smaller degree the euro, the United Kingdom pound sterling, and the Japanese yen, and used to back its obligations, e.g., the local currency delivered, and the various bank reserves deposited with the central bank, by the administration or financial institutions.

You must understand that in a strict intellect, foreign-exchange reserves ought to only comprise foreign exchange deposits and bonds. Though, the term in popular sage usually also adds gold reserves, special drawing rights (SDRs), and International Monetary Fund (IMF) reserve positions. This wider number is more readily available, but it is more precisely referred to as official international reserves or international reserves.

Foreign Exchange reserves are termed as Reserve Assets in the Balance of Payments and are placed in under the financial account. Hence, they are generally a significant part of the International Investment Position of a country. The reserves are labelled as reserve properties below assets by functional category. In terms of financial assets classifications, the reserve assets can be secret as Unallocated gold accounts, Gold bullion, currency, Special drawing rights, Reserve position in the International Monetary Fund, interbank position, other moveable deposits, other deposits, loans, debt securities, listed and unlisted equity, investment fund shares and financial derivatives, for instance forward contracts and options.

You must remember that there is no counterpart for reserve assets in liabilities of the International Investment Position. Generally, when the monetary authority of a country has certain kind of liability, this will be comprised in other classes, such as Other Investments. In the Central Bank’s Balance Sheet, foreign exchange reserves are assets, along with domestic credit.

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