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Chapter 3 - Coggle Diagram

- - - - Importers and exporters
      - Speculators
  - - - Letter of credit, invoice, shipping document, bill of lading
  - - - Strong economic activities (GDP)
      - Increase in private investment
      - Volatile ST capital flows
    - - Currency attack
      - Panic selling activities – corporations, banks, mutual funds moved out their funds
        from the region.
      - Remedies:
        
        Fix MYR against USD on 2nd Sept 1998 at RM 3.8 per USD 1.
        
        Limit offer of swap transactions with non-resident banks in Aug 1997
  - - - Meet requirements of the corporations
      - Own trading positions
      - Authority was given under BAFIA 1989 (Banking & Financial Institution Act)
    - - Pay exporters for the purchase of goods and services
      - Investment in FOREX
    - - Investment in FOREX
    - - Act as a middleman in identifying buyers and sellers who have the same amount to trade in foreign currencies
      - Income comes from commission for any transactions done
      - Interact with banks by giving “indication rates” and “dealing rates” of various currencies.
    - - Ensure exchange rate is stable and not fluctuate excessively
      - Manage foreign reserves of Malaysia
      - Intervene in FOREX market to reduce market volatilities by buying or selling large amount of currencies.
      - Decide to impose policies on FOREX such as fixed rate or managed floating exchange rate regime (depends on economic
        condition)
- - - - Centerpiece of the FOREX market is USD
      - Considered as base currency for quotation
  - - - 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.
  - - - A day after spot date
      - 1 week
      - 1/3/6/9 months
      - 1 year
- - - - Borrower is unable to make payment on the maturity date agreed.
      - Default payment – other party suffer losses
    - - 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
    - - Banks’ revenues are negatively affected with interest rate fluctuations
      - Maturities of assets and liabilities are no the same (mismatched position)
    - - Bad operational system in the MM
        
        Poor system or technology to handle large transactions
        
        Bad backup system
        
        Poor reporting system
        
        Inexperience and incompetence management
  - - - Establish credit limit (authorized maximum amount that an institution can borrow from another
        institution)
    - - Have a mixture of ST and LT instruments for faster liquidation.
      - monitor liquidity ratio regularly
    - - 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.
    - - Update with the latest financial system
      - Train employees on the latest financial system
      - Invest in suitable IT system
      - Ensure efficient “back-office” department to smoothen outflow of documents to avoid
        non-paymen
- - - - GDP, inflation (CPI), unemployment, trade balances, money supply
      - Taxation policies, fiscal & monetary policies, govt debt positions, etc.
    - - Political uncertainties, election, scandal
    - - Economic conditions of large economies (US, EU, China)
    - - Optimism, pessimism, fears, rumors
    - - Normally conducted by foreign banks, international fund managers and hedgers who have huge funds
    - - High demand for FOREX if a country has high interest rate – currency appreciation
  - - - Different amount need to be paid by importers (not as per the agreed amount)
      - Value of assets and liabilities denominated in foreign currency move
        adversely
      - Revaluation losses (for firms who have offices outside the country)
    - - Happens when there is a default payment on the delivery date by one party, causing another party to incur losses.
- - - - Riskier – anticipate movement of currency that he bought or sold.
      - If speculator is optimistic on USD
        
        He anticipates USD is moving upward in near future
        
        Buy USD against MYR
        
        Position: long USD
      - If speculator is pessimistic on USD
        
        Sell USD against MYR
        Position: short USD
    - - Dealers take care of customers who are in need of foreign exchange
      - Once customer buy/sell currency, dealers will IMMEDIATELY square the position to
        avoid any risk