Q. With reference to “Reserve currency” consider the following statements::
1.It is a large amount of currency held by central banks to use for international transactions.
2.A reserve currency reduces exchange rate risk.
3.A reserve currency is a non-convertible currency.
Which of the statements given above are correct?
Statement 1 and 2 are correct. Reserve currency is a large amount of currency held by central banks to use for international transactions. A reserve currency reduces exchange rate risk because the purchasing country will not need to exchange its currency for the reserve currency while making purchases.
Statement 3 is incorrect. A reserve currency’s main feature is that it must be easily convertible and have a stable value.
Source: The Times of India