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CHAPTER 3: MONEY MARKET AND FOREX (MONEY MARKET A market for short term…
CHAPTER 3: MONEY MARKET AND FOREX
MONEY MARKET
A market for short term mobilization of funds among market participants
Maturity of 1 year
CATEGORIES OF MM OPERATIONS
Sale & purchase of MM instrument
Outright sales & purchase
Involves the trading of instrument directly by buyinh and selling the instruments among the participants
Repurchase agreement market (REPO)
An undertaking by a bank to repurchase MM instrument initially sold to a customers at an agreed price for a specified future date
Direct lending & borrowing
INSTRUMENTS OF MM
:star: NIDs
:star: BAs
:star: MGS
:STAR: REPO
:STAR: BNBs
:star: Cagamas bonds and notes
:star: Khazanah bonds
MANAGEMENT OF MM RISK
CREDIT RISK
: establish credit limits
LIQUIDITY RISK
: balance of short and long term assets
INTEREST RATE RISK
: have tools to predict rates and to run a matched book
OPERATIONAL RISK
: provide training & update system
MM RISK
CREDIT RISK
: non payment of loan/financing
LIQUIDITY RISK
: inability to convert assets to cash or to have excess funds
INTEREST RATES RISK
: fluctuation leads to adverse value of assets
OPERATIONAL RISK
: bad system & manpower problems
FEATURES
:fountain_pen: There are must be lender and borrowers and buyers and sellers
:fountain_pen: Focused short term funds
:fountain_pen: A 'commodity' traded that is money and price is attached, that is interest rates
OBJECTIVES OF MM
To provide an outlet for participation of MM instrument
To able to lend out and/or obtain funds at competitive rates
To minimize cost of funds and maximize profits
To manage liquidity position and reserve requirements
FOREX
A market where participants buy and sell currencies.
CHARACTERISTIC
:check: A transaction between a willing buyer and willing seller
:check: An exchange rate is available
:check: Need to have a commercial doc for corp
:check: Mechanism is available to effect payment
:check: Facilities available- international dealing system
FACTORS
Political
Economic factors
Technical factors
Speculation and hedging
Market psychology and sentiments
International events
GOV policies
PARTICIPANTS
:STAR: Commercial banks - for corp needs or trading
:star: Corporations- for commercial needs
:star: NBFi- for commercial needs
:star: BNM- for intervention to reduce volatilities
BNM ROLE IN FOREX
To intervene the forex market to reduce fluctuations
To manage float the currency to avoid heavy trading that can cause volatilities
FOREX RISKS
Transaction risk- exposure due to fluctuation
Translation risk- revaluation of assets due to fluctuation; for corp having assets overseas
Settlement risk- non payment on the exchange amt (default pymnt)
TYPES OF FOREX TRANSACTION
:pencil2: SPOT RATE - is the value of the currency to be transacted for two good business days delivery
:pencil2: FORWARD RATE - is the value of the currency to be transacted for delivery after two good business day
STOP-LOSS STRATEGY
A strategy to limit losses- minimizing overall risk or losses of banks
Done only when the position is bad
Clear the position at the stop-loss rate
BASIC TRADING STRATEGIES
COMMERCIAL TRADING
:STAR: Get the rate from the market and provide quotation to the customers; square off position immediately.
SPECULATIVE TRADING
:STAR: Short-term trading, interpret info using trading tools for short term purpose; square same day or few days later
:star: Structural trading, interpret data on a long term basis; squaring position months later
