CHAPTER 3: MONEY & FOREIGN EXCHANGE MARKET

MONEY MARKET

FOREIGN EXCHANGE MARKET

PARTICIPANTS

MM INSTRUMENTS

OBJECTIVE

MM RISKS

Maximize profits and minimize costs of funds

Lend out (obtain funds) at competitive rates

Manage liquidity position and reverse requirements

Banking Institution

Non-bank financial institution

BNM - supervising and contolling authority

Corporation

Cagamas Berhad

Money brokers - intermediaries to market participants

Treasury bills

Bank Negara bills

Repurchase agreement

Banker acceptance (BA)

Negotiable instruments of deposits (NIDs)

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

PARTICIPANTS

QUOTATIONS

CHARACTERISTICS

FACTOR EFFECTING FOREX MARKET

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

Non-bank financial institutions

Money brokers

Corporations

BNM

Commercial banks

1) SPOT MARKET - market for spot rate and spot date

2) FORWARD MARKET - FOREX market for value anytime after 2 good business days

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

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

Riskier - anticipate movement of currency that he bought / sold

Difference between buying rate and selling rate is the profit generated

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