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Money and credit - Ivanov V.M.

14.4. Protective Reservations

Gold and currency protective clauses were applied after the Second World War.

The gold clause is based on fixing the gold content of the payment currency on the date of conclusion of the contract and recalculating the payment amount in proportion to the change in the gold content on the execution date. Direct and indirect gold clauses were distinguished. With a direct reservation, the amount of the obligation was equal to the weighted amount of gold; if indirect, the amount of the obligation, expressed in a currency, was recalculated in proportion to the change in the gold content of this currency (usually the dollar). The application of this clause was based on the fact that in the conditions of the post-war Bretton Woods currency system there were official gold parities - the ratio of currencies according to their gold content, which from 1944 to 1976 were established on the basis of the official gold price, expressed in dollars. However, due to periodic fluctuations in the market price of gold and frequent devaluations of leading world currencies, the gold clause gradually lost its protective properties and ceased to be used after the adoption of the Jamaican currency system, which abolished gold parities and the official price of gold.

Currency clause - a clause in an international contract, according to which the payment amount is reviewed in proportion to the change in the exchange rate of the clause to insure the currency or credit risk of the exporter or creditor. The most common form of a currency clause is a mismatch between the price currency and the payment currency. At the same time, the exporter or creditor is interested in choosing the most stable currency or currency as the price currency, the exchange rate of which is forecasted, since when making a payment, the payment amount is calculated proportionally to the price currency rate.

In order to reduce the risk of a fall in the currency exchange rate, multicurrency reservations have spread in practice.

A multicurrency clause is a condition in an international contract, according to which the payment amount is reviewed in proportion to the change in the exchange rate of a basket of currencies pre-selected by agreement of the parties. A multi-currency clause has advantages over a single-currency clause:

• firstly, the currency basket as a method of measuring the weighted average exchange rate reduces the risk of a sharp change in the payment amount;

• secondly, it is most consistent with the interests of the counterparties of the transaction in terms of currency risk, since it includes currencies of different stability.

At the same time, the disadvantages of a multicurrency reservation include the difficulty of formulating a reservation in a contract depending on the method of calculating exchange rate losses, the inaccuracy of which leads to different interpretations of the terms of the reservation by the parties. Another disadvantage of a multicurrency reservation is the difficulty in choosing a base basket of currencies.

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

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

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

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

4. Adjustable basket - currencies change depending on market factors.

The advantage of using SDRs or the euro as the basis of a multicurrency clause is that their regular and generally recognized quotes eliminate uncertainty in the calculation of payment amounts.

The components of the currency clause mechanism are as follows:

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

• date of the base value of the currency basket - the date of signing the contract or the date preceding it, sometimes a moving date of the base value is applied, which creates additional uncertainty;

• date or period for determining the notional value of the currency basket at the time of payment: usually a business day immediately before the payment day or several days before it;

• limitation of the effect of the foreign exchange clause when the exchange rate of the payment currency changes compared to the exchange rate of the reservation currency by setting the lower and upper limits of the reservation (usually as a percentage of the payment amount).

The forms of multicurrency clauses are:

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

• option of payment currency - at the time of conclusion of the contract, the price is fixed in several currencies, and upon payment, the exporter has the right to choose the payment currency.

The limited use of the currency clause in general (and multicurrency in particular) lies in the fact that it insures against currency and inflation risk only to the extent that the increase in commodity prices affects the dynamics of exchange rates. An example is Russia, where currency clauses are now practiced everywhere, including in domestic payments: despite the fact that sellers of goods, as a rule, negotiate their price depending on the dollar exchange rate, their losses from internal inflation are not compensated by the growth of the exchange rate. In world practice, commodity-price clauses are used to insure exporters and creditors against inflation risk.

A commodity-price clause is a condition included in an international contract for insurance against inflation risk. Reservation clauses include:

• reservations about a moving price, increasing depending on pricing factors;

• Index clause - a condition under which payment amounts vary in proportion to price changes for the periods from the date of signing to the time the obligation is fulfilled; they are not widely used in world practice because of difficulties with the choice and recalculation of indices that really reflect price increases;

• combined currency 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, payment amounts are calculated proportionally to the changed factor. If, over the period between the signing and execution of the agreement, the dynamics of exchange rates and the dynamics of commodity prices did not coincide, then the payment amount changes by the difference between the deviation of prices and rates;

• compensation transaction for insurance of foreign exchange risks when lending: the amount of the loan is linked to the price in a certain currency (a basket of currencies can be used) of the goods supplied to repay the loan.