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