Money and credit - Ivanov VM

14.4. protection clause

Gold and currency protection clauses applied after the Second World War.

Golden clause is based on the fixation of the gold content of the currency of payment at the date of conclusion of the contract and the terms of payment in proportion to the amount of gold content on the execution date. There are direct and indirect gold clause. For direct reservation amount of the liability was equal to the weight quantity of gold; if indirect - the amount of liabilities, expressed in foreign currency, recalculated in proportion to the change in the gold content of the currency (usually the US dollar). The application of this clause was based on the fact that in the post-war Bretton Woods monetary system existed official gold parities - the ratio of exchange for their gold content, which from 1944 to 1976 established on the basis of the official price of gold expressed in dollars. However, due to periodic fluctuations in the market price of gold and the frequent devaluations of the world's leading currency gold clause gradually lost its protective properties and has ceased to be used after the adoption of the Jamaican currency system, abolished the gold parities and official price of gold.

Currency clause - a condition in which the international contract, according to which the payment amount is revised in proportion to the change in the exchange rate clause for the insurance of currency or credit risk of the exporter or the lender. The most common form of currency clause - mismatch of currency prices and currency of payment. In this case the exporter or the lender is interested in the fact that, as currency rates to choose the most stable currency or currency appreciation which is projected as the implementation of payment payment amount counts Xia proportional to the rate of exchange rates.

To reduce the risk of falling prices of course in practice became widespread currency multicurrency clause.

Multicurrency clause - a condition in which the international contract, according to which the payment amount is revised in proportion to the course a basket of currencies, pre-selected by mutual agreement. Multicurrency clause has advantages over the single currency:

• First, the currency basket as a method of measuring the weighted average exchange rate reduces the risk of abrupt changes in the amount of payment;

• Second, it is more in the interest of the transaction counterparties in terms of currency risk, as it involves different currency stability.

However, the shortcomings of the multicurrency clause include the complexity of the wording of clauses in the contract, depending on the method of calculating foreign exchange losses, which leads to inaccurate interpretation of the various parties to the conditions of the reservation. Another disadvantage is the complexity of the multicurrency clause selecting basic basket of currencies.

After the abolition of gold exchange standard and the regime of fixed parities and courses in the transition to the Jamaican currency system of floating exchange rates and international monetary units equated to a certain basket of currencies. There are several types of currency baskets. They differ in the composition of currencies.

1. Symmetrical basket - currencies are endowed with the same specific gravity.

2. Asymmetric basket - currencies are endowed with different specific weight.

3. Standard basket - currencies are fixed for a certain period of application of the currency unit as a currency clause.

4. Adjustable Basket - Currency change depending on market factors.

The advantage of using the SDR or EUR as the base multicurrency clause is that the regular and recognized their quotes eliminate uncertainty in the calculation of the amounts of payments.

The components of the mechanism of currency clause are as follows:

• the beginning of its operation, depending on the set in the contract limit exchange rate fluctuations;

• the date of the base cost of a basket of currencies - the date of signing the contract or the date precedes it, is sometimes used moving date base value, which creates additional uncertainty;

• Date or period of determining the relative value of the currency basket at the time of payment: usually a working day immediately prior to the payment day or a few days in front of him;

• restriction of currency clause when changing the currency of payment of the course, compared with the rate of currency clause by setting lower and upper limits of the reservation (usually a percentage of the amount of the payment).

Forms multicurrency clause are:

• Use as few currencies the currency of payment of the agreed set of, for example, US dollar, Swiss franc and the pound sterling;

• Currency option payment - at the time of conclusion of the contract price is recorded in multiple currencies and payment upon the occurrence of the exporter has the right to choose the currency of payment.

The limited use of currency clause at all (and multicurrency in particular) is that it insures against currency and inflation risk only to the extent that commodity price increases is reflected in the dynamics of exchange rates. An example is Russia, where foreign currency clause is now practiced all over the place, including for internal calculations: despite the fact that the sellers of goods, usually stipulate their price depending on the dollar, their losses on domestic inflation not offset by growth rate. In the world practice to insure exporters and lenders against the risk of inflation used commodity-price clause.

Commodity-price clause - a provision included in the international contract for insurance against inflation risk. For commodity-price clauses are:

• escalation clauses, increases depending on pricing factors;

• index clause - a condition in which the payment amount changes proportionally to the change in prices for the periods from the date of signing until the fulfillment of the obligation; they are not widely known in the world because of the difficulties with the selection and recalculation of the index, reflecting the actual price increases;

• combination of monetary and commodity clause - used to regulate the amount of payment taking into account changes in exchange rates and commodity prices. In the case of unidirectional dynamics of changes in exchange rates and commodity prices are calculated payment amount is proportional to the changing factor. If the period between the signing of the agreement and the execution of the dynamics of exchange rates and the dynamics of commodity prices do not match, then the amount of the payment varies by the difference between the price deviation and courses;

• compensation deal for the insurance of currency risks in lending: loan amount is tied to the price of a certain currency (currency basket can be used) goods delivered to repay the loan.