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MONEY AND FOREIGN EXCHANGE MARKET - Coggle Diagram
MONEY AND FOREIGN EXCHANGE MARKET
MONEY MARKET
Market for short-term mobilization of funds.
Trading financial instruments
Bankers acceptance (BA)
Khazanah bonds
Bank Negara bills
Treasury bills (T-Bills)
Cagamas bonds and cagamas notes
Maturity: overnight to 1 year
CONT: MONEY MARKET
Changes in the basis for the variable rate in MM instruments:
KLIBOR (Kuala Lumpur Interbank Offered Rate) – also known as indicator of the interbank rate
KLIBOR – changed to Intervention Rate
New framework from 2004 – OPR as the target rate for the day-to-day liquidity operations of BNM
DEVELOPMENT OF MM IN
MALAYSIA
Jan 1990
Introduction of SPEEDS (Sistem Pemindahan Elektronik untuk Dana & Sekuriti)
Electronic fund transfer and scripless trading system.
Faster settlement of the MM instruments
SPEEDS was replaced by a new payment system called RENTAS (Real-Time Electronic Transfer of Funds and Securities)
Fund transfers are settled IMMEDIATELY.
Jan 1994
Launched of the Islamic Interbank Money Market (IIMM)
Transactions are done using Islamic nterbank Cheque Clearing System (IICCS)
Sales and purchases of Islamic financial instruments
Investment activities
Cheques clearing
1989
Appointment of selected FIs as Principal Dealers
Underwrite and create markets for the PRIMARY ISSUES of MGS, T-Bills and Cagamas Bonds.
1990
Formation of Rating Agency of Malaysia (RAM)
1995
Formation of Malaysian Rating Corporation Berhad (MARC)
Purpose of credit rating:
To evaluate creditworthiness of corporate bond issues by issuing ratings to corporate bonds
Provide mechanism to investors to choose which bonds should be invested based on ratings
Ensure investors’ confidence in MM.
OBJECTIVES, OPERATIONS, PARTICIPANTS AND CATEGORIES OF MM
OBJECTIVES OF MM
Ensure participants are able to trading MM instruments
Lend out (obtain funds) at competitive rates
Maximize profits and minimize costs of funds
Manage liquidity position and reserve requirements
PARTICIPANTS OF MM OPERATIONS
:
BNM – supervising and controlling authority
Banking institutions (commercial and investment banks)
Non-bank financial institutions
Pension funds
Unit trust funds
Insurance companies
Corporations
Multinational
Small and medium scale enterprises
Cagamas Berhad
Money brokers – intermediaries to market participants
DESCRIPTION OF MM INSTRUMENTS
NEGOTIABLE INSTRUMENTS OF DEPOSITS (NIDs)
Yield instrument – interest bearing
Deposit document issued by a bank to a customer
Can be sold before maturity
Negotiable instrument – if sold before maturity at secondary market.
Tenure range from 1 month to 10 years
Issued in multiple of RM 50,000
Minimum deposit is RM 100,000 per certificate
Maximum deposit is RM 10 million per certificate
Interest rate of NIDs depends on interbank rates.
Withholding tax
CHARACTERISTICS, DEVELOPMENT AND PARTICIPANTS OF FOREX MARKET
FOREIGN EXCHANGE MARKET
Vital to complete international transactions
Importers and exporters
Speculators
Place to purchase or sell required currencies
CHARACTERISTICS OF FOREX MARKET
Must have a willing buyer and willing seller (foreign exchange dealers) of the currencies.
Exchange rate is available for 2 currencies required.
Facilities are available for the institutions to operate
HISTORY & DEVELOPMENT OF FOREX MARKET
Active FOREX market is a result of
Strong economic activities (GDP)
Increase in private investment
Volatile ST capital flows
Statistically in Malaysia, FOREX market is not in line with GDP
BANKERS’ ACCEPTANCE (BA)
Discounted instrument – non-interest bearing
Bill of exchange drawn on a bank
Created to finance a customer for trade transaction
Trade financing facility available to importers & exporters (buyers & sellers)
Negotiable instrument – can be sold to investors
Maturity: 21 days to 200 days
Issued in multiple of RM 1000
Minimum denomination is RM 30,000
MONEY MARKET RISKS AND MANAGING RISKS
credit risk
Borrower is unable to make payment on the maturity date agreed.
Default payment – other party suffer losses
Liquidity Risk
Banks do not have enough funds to meet commercial / trading requirements
Possible reason: bank has small credit limit
Banks are unable to convert existing assets into cash at reasonable market price
Interest rate risk
Banks’ revenues are negatively affected with interest rate fluctuations.
Maturities of assets and liabilities are no the same (mismatched position)
Operational risk
Bad operational system in the MM
Poor system or technology to handle large transactions
Bad backup system
Poor reporting system
Inexperience and incompetence management
MALAYSIAN GOVERNMENT SECURITIES (MGS)
Yield instrument - Interest bearing
Issued by BNM to obtain funds from public specifically to finance national development projects.
Government agreed to pay:
Issued in multiples of RM 1,000
Quoted in price terms per RM 100 nominal value.
REPURCHASE AGREEMENT (REPO)
Yield instrument
Sale of financial instrument by a bank with an undertaking to repurchase back at agreed price on specified future date.
Period: number of days
Collaterized deposit arrangement
TREASURY BILLS
Discounted instrument – non-interest bearing
Issued by BNM on behalf of Malaysia government
Used to raise short-term funds to finance government’s expenditures
Maturity not exceeding a year
BANK NEGARA BILLS
Discounted instrument – non-interest bearing
Issued by BNM
Maturity not exceeding a year
Often used for Open Market Operations (monetary policy tool)
Categorized as liquid asset for financial institution compliance of the liquidity and SRR.
CALCULATION OF PROCEEDS OF YIELD INSTRUMENTS AND DISCOUNTED INSTRUMENTS
SIMPLE INTEREST
Used to calculate interest for NIDs, REPO, MGS
Interest = (principal x rate x number of days) / 36500
PROCEEDS OF NIDs
Used to calculate sales proceeds / cost of purchases of NIDs when they are traded in secondary market.
Proceeds = FV x (36500 + (T1 X R1))/(36500 + (T2 X R2))
T1 = original issue rate
R1 = original tenor (in days)
T2 = rate at which the sale / purchase is agreed
R2 = remaining days to maturity
where FV = face value or principal amount
PROCEEDS OF THE DISCOUNTED INSTRUMENTS
Used to calculate proceeds of the discounted instruments (BA, T-Bills, Bank Negara bills)
Proceeds = FV X [(1/365000) – (r x t)]
r = maturity
t = rate agreed
FV = face value or principal amount
HOW TO MANAGE MM RISKS
Credit risk
Establish credit limit (authorized maximum amount that an institution can borrow from another institution
Liquidity risk
Have a mixture of ST and LT instruments for faster liquidation.
monitor liquidity ratio regularly
Interest rate risk
Predict rates and prices of financial instruments
Run a “matched book” to avoid gaps between assets and liabilities
Need to have financial tools to analyze and predict interest rates.
Operational risk
Update with the latest financial system
Train employees on the latest financial system
Invest in suitable IT system
FOREX QUOTATIONS (SPOT & FORWARD)
Quotations
To buy a currency, rate between currencies must be QUOTED.
Involves buying a currency, and selling another currency.
USD
SPOT MARKET
Market for spot rate & spot date
Spot rate = value of currency to be transacted
Spot date = 2 days after the transaction date
Transaction date = date of which 2 parties deal with each other to perform foreign currency transactions
Good business days = days exclude holidays and weekends.
FORWARD MARKET
FOREX market for value ANYTIME after 2 good business days
A day after spot date
1 week
1/3/6/9 months
1 year