1. What are foreign currency commitments? Why are they considered special?
A. Foreign Currency
Commitment:- Introduction
I. Foreign Currency Commitment means, with respect to
each Foreign Currency Lender, the commitment of such Foreign
Currency Lender in an aggregate principal amount at any time
outstanding of up to such Foreign Currency Lender’s Applicable
Percentage of the Foreign Currency Committed Amount (i) to make
Foreign Currency Loans in accordance with the provisions of Section
3.1(a) and (ii) to purchase participation interests in the Foreign
Swingline Loans in accordance with the provisions of Section
3.3(d)
II. Foreign Currency Commitment means, with respect to
each Foreign Currency Lender, the commitment of such Foreign
Currency Lender to make Foreign Currency Loans hereunder, expressed
as an amount representing the maximum aggregate amount of such
Foreign Currency Lender’s Foreign Currency Loans hereunder, as such
commitment may be (a) reduced from time to time pursuant to Section
2.08 and (b) reduced or increased from time to time pursuant to
assignments by or to such Lender pursuant to Section 10.04.
III. Examples of Foreign Currency Commitment
• The Foreign Currency Commitment Unused Fee shall
commence to accrue on the Closing Date and shall be due and payable
in arrears on the last Business Day of each March, June, September
and December (and any date that the Foreign Currency Committed
Amount is reduced as provided in Section 4.4 and the Maturity Date)
for the immediately preceding quarter (or portion thereof),
beginning with the first of such dates to occur after the Closing
Date.
• The amount of principal and interest paid on the
Foreign Currency Loans prior to receipt of the proceeds of a sale
of participations therein shall be shared by the Foreign Currency
Lenders pro rata based on the amount of the Foreign Currency
Commitment of each (or if the Foreign Currency Commitments shall
have terminated, based on the Foreign Currency Loans held by
each).
B. The country's exporters deposit foreign currency
into their local banks. They transfer the currency to the central
bank. Exporters are paid by their trading partners in U.S. dollars,
euros, or other currencies. The exporters exchange them for the
local currency. They use it to pay their workers and local
suppliers. The banks prefer to use the cash to buy sovereign debt
because it pays a small interest rate. The most popular are
Treasury bills because most foreign trade is done in the U.S.
dollar due to its status as the world's currency. Banks are
increasing their holdings of euro-denominated assets, such as
high-quality corporate bonds. That continued despite the euro zone
crisis. They'll also hold gold and special drawing rights. A third
asset is any reserve balances they've deposited with the
International Monetary Fund.
• First, countries use their foreign exchange reserves
to keep the value of their currencies at a fixed rate. A good
example is China, which pegs the value of its currency, the yuan,
to the dollar. When China stockpiles dollars, it raises the dollar
value compared to that of the yuan. That makes Chinese exports
cheaper than American-made goods, increasing sales.
• Second, those with a floating exchange rate system
use reserves to keep the value of their currency lower than the
dollar. They do this for the same reasons as those with fixed-rate
systems. Even though Japan's currency, the yen, is a floating
system, the Central Bank of Japan buys U.S. Treasurys to keep its
value lower than the dollar. Like China, this keeps Japan's exports
relatively cheaper, boosting trade and economic growth. Such
currency trading takes place in the foreign exchange market.
• A third and critical function is to maintain
liquidity in case of an economic crisis. For example, a flood or
volcano might temporarily suspend local exporters' ability to
produce goods. That cuts off their supply of foreign currency to
pay for imports. In that case, the central bank can exchange its
foreign currency for their local currency, allowing them to pay for
and receive the imports.
1. What are foreign currency commitments? Why are they considered special?
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