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CHAPTER 3: MONEY & FOREIGN EXCHANGE MARKET - Coggle Diagram
CHAPTER 3: MONEY & FOREIGN EXCHANGE MARKET
MONEY MARKET
PARTICIPANTS
Banking Institution
Non-bank financial institution
BNM - supervising and contolling authority
Corporation
Cagamas Berhad
Money brokers - intermediaries to market participants
MM INSTRUMENTS
Treasury bills
Bank Negara bills
Repurchase agreement
Banker acceptance (BA)
Negotiable instruments of deposits (NIDs)
OBJECTIVE
Maximize
profits and
minimize
costs of funds
Lend out
(obtain funds) at competitive rates
Manage
liquidity position
and reverse requirements
MM RISKS
Liquidity risks
- bank do not have enough funds to meet commercial/ trading requirements
Interest rate risks
- bank revenue are negatively affected with interest rates fluctuations
Credit risks
- borrower unable to make payment on the maturity date agreed
Operational risks
- bad operational system in the MM
HOW TO MANAGE MM RISKS
Liquidity risks
- monitor liquidity ratio regularly
Interest rate risks
- predict rates and prices of financial instruments
Credit risks
- establish credit limit
Operational risks
- update with the latest financial system
FOREIGN EXCHANGE MARKET
PARTICIPANTS
Non-bank financial institutions
Money brokers
Corporations
BNM
Commercial banks
QUOTATIONS
1) SPOT MARKET
- market for
spot rate and spot date
2) FORWARD MARKET
- FOREX market for value anytime after 2 good business days
CHARACTERISTICS
facilities are available
for the institutions to operate
mechanism to effect
large amount of payments locally and globally
through an
electronic computer network system
exchange of rate is available for
2 currencies
required
corporation must have
commercial documents
to support their foreign exchange needs
must have a
willing buyer
and
willing seller
of the currencies
FACTOR EFFECTING FOREX MARKET
global economic conditions
market sentiments
geopolitical factors
speculation
domestic,economic condition and economic policies
difference interest rates between countries
FOREIGN EXCHANGE RISKS
Transaction risks
- happens when exchange rate fluctuates
Settlement risks
- happen where there is a default payment on the delivery date by one party, causing another party to incur losses
BASIC TRADING STRATEGIES
1) SPECULATIVE PURPOSE
Riskier - anticipate movement of currency that he bought / sold
Difference between
buying rate and selling rate
is the profit generated
2) COMMERCIAL PURPOSE
dealer take care of costumers
who are in need of foreign market
once costumers buy/sell currency, dealer will
immediately square the position to avoid any risk
MINIMIZING RISK- STOP LOSS STRATEGIES
can be used to
limit losses
and
minimize risks
STOP-LOSS RATE =
( max amount of losses / position amount) +/-position rate