REVALUATION OF IMF’S SPECIAL DRAWING RIGHTS AND CURRENCY PORTFOLIO DIVERSIFICATION: IMPLICATIONS FOR OIL AND GAS FINANCE

We employ the methods of Markowitz (1952) and Sharpe (1954) to analyze how the addition of the Chinese Renminbi to the International Monetary Fund's (IMF's) Special Drawing Rights (SDR) basket of currencies in 2016 affects the use of SDR as a minimum variance portfolio (basket) of currencies, which could thus reduce the risk of currency fluctuations. Switching from the US dollar in oil pricing to a SDR basket made up of US dollar, euro, British pound, Japanese yen and Chinese yuan may have implications for oil industry and their physical and derivatives markets in North America, Europe, Asia, and Middle East. Our data are the monthly spot rates expressed in SDR for the years 2016-2018. We find that the currency weights of a hypothetical minimum-variance portfolio generated by our analysis in similar to the SDR basket weights. Results of our analysis are similar to the results reported earlier by Essayyad and Algahtani (2005), who performed a similar analysis using 1999-2003 data.