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CHAPTER 3 : MONEY AND FOREIGN EXCHANGE MARKET - Coggle Diagram
CHAPTER 3 : MONEY AND FOREIGN EXCHANGE MARKET
INTRODUCTION
money market
Participants in the money market can fulfil their liquidity needs by investing in interbank deposits or purchasing and selling money market instruments.
foreign exchange market
The foreign exchange market allows numerous parties, including regulators, speculators, and, most importantly, companies, to satisfy their foreign currency needs.
Vital to complete international transactions
MONEY MARKET
development and structure of money market
short term movement of funds among market participants.
maturity of instruments traded is from overnight to 1 year.
Trading financial instruments
Khazanah bonds
Bank Negara bills
Bankers acceptance (BA)
DEVELOPMENT OF MM IN
MALAYSIA
Jan 1990
Introduction of SPEEDS (Sistem Pemindahan Elektronik untuk Dana & Sekuriti)
Jan 1994
Launched of the Islamic Interbank Money Market (IIMM)
1995
Formation of Malaysian Rating Corporation Berhad (MARC)
OBJECTIVES
Ensure participants are able to trading MM instruments
Lend out (obtain funds) at competitive rates
Maximize profits and minimize costs of funds
PARTICIPANTS
BNM – supervising and controlling authority
Banking institutions (commercial and investment banks)
Non-bank financial institutions
Pension funds
Unit trust funds
Insurance companies
CATEGORIES OF MM
DIRECT LENDING AND
BORROWING
Bank will lend (deposits) or borrow directly
from another bank.
Rate is agreed by both parties.
SALE AND PURCHASE OF MM
INSTRUMENTS
Indirect method of borrowing or lending funds.
Done in securities market.
Outright S&P of instruments
Repurchase agreement (REPO)
DESCRIPTION OF
MM INSTRUMENTS
NEGOTIABLE INSTRUMENTS
OF DEPOSITS (NIDs)
PROCEEDS OF NIDs
FV x (36500 + (T1 X R1)) / (36500 + (T2 X R2))
BANKERS’ ACCEPTANCE
(BA)
REPURCHASE AGREEMENT
(REPO)
TREASURY BILLS
MALAYSIAN GOVERNMENT
SECURITIES (MGS)
MONEY MARKET RISKS
Credit risk
HOW TO MANAGE
Establish credit limit (authorized maximum amount that an institution can borrow from another
institution)
Predict rates and prices of financial instruments
monitor liquidity ratio regularly
Liquidity risk
Interest rate risk
FOREX MARKET
CHARACTERISTICS
Must have a willing buyer and willing seller (foreign exchange dealers) of the currencies.
Exchange rate is available for 2 currencies required.
Mechanism to effect large amount of payments locally and globally through an electronic computer network systerm
HISTORY & DEVELOPMENT
Statistically in Malaysia, FOREX market is not in line with GDP
Active FOREX is a result of:
Strong economic activities (GDP)
Increase in private investment
financial crisis – heavy speculation on MYR.
Panic selling activities – corporations, banks, mutual funds moved out their funds from the region.
PARTICIPANTS
Commercial banks
Corporations
Money brokers
QUOTATIONS
To buy a currency, rate between currencies must be QUOTED.
Involves buying a currency, and selling another currency.
Centerpiece of the FOREX market is USD
SPOT MARKET
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
FORWARD MARKET
FOREX market for value ANYTIME after 2 good business days
Good business days = days exclude holidays and weekends.
FACTORS AFFECTING FOREX
MARKET
Domestic economic condition & economic policies
Geopolitical factors
FOREIGN EXCHANGE RISKS
Transaction risk
Settlement risk
MINIMIZING
RISK
STOP-LOSS STRATEGIES
Stop-loss rate = (maximum amount of losses / position amount) +/- position rate