-:PRESENTATION ON:-

Money Market And Forex

By:- (MBA-IB 2nd YEAR)
Name Roll no.
Vaibhav Thange -
9003
 Money Market
Ø Money market means market where money
or its equivalent can be traded.
Ø Money Market is a wholesale market of short
term debt instrument and is synonym of
liquidity..
Ø Money Market is part of financial market
where instruments with high liquidity and
very short term maturities ie one or less than
one year are traded.

 The Players
ØReserve Bank of India
ØSBI DFHI Ltd (Amalgamation of Discount &
Finance House in India and SBI in 2004)
ØAcceptance Houses
ØCommercial Banks, Co-operative Banks
and Primary Dealers are allowed to
borrow and lend.
ØSpecified All-India Financial Institutions,
Mutual Funds, and certain specified
entities are allowed to access to
Call/Notice money market only as
lenders.
 Money Market Securities
ØMaturity of a year or less.
ØDebt securities issued by corporations
and governments that need short-term
funds.
ØLarge primary market focus.
ØPurchased by corporations and financial
institutions.
ØSecondary market for securities.
•
 Money Market Securities
ØTreasury Bills
ØCommercial paper
ØNegotiable certificates of deposits
ØRepurchase agreements
ØFederal funds
ØBanker’s acceptances

 Money Market Securities
ØTreasury bills:
ØIssued to meet the short-term needs
of the U.S. government
•

ØAttractive to investors
ØMinimal default risk—backed by Federal
Government
ØExcellent liquidity for investors
ØShort-term maturity
ØVery good secondary market
 Money Market Securities

•
Competitive Bidding
ØTreasury bill auction (fill bids in amount
determined by Treasury borrowing
needs):
ØBid process used to sell T-bills
ØBids submitted to Federal Reserve banks
by the deadline
ØBid process:
Ø Accepts highest bids
Ø Accepts bids until Treasury needs generated
 Money Market Securities
•

 N o n co m p e titive B id d in g
ØTreasury bill auction—noncompetitive
bids
Ø($1 million limit):
ØMay be used to make sure bid is accepted
ØPrice is the weighted average of the
accepted competitive bids
ØInvestors do not know the price in
advance so they submit check for full
par value
ØAfter the auction, investor receives check
from the Treasury covering the
difference between par and the actual
 Money Market Securities
Estimating T-bill yield
ØNo coupon payments
ØPar or face value received at maturity.
ØYield at issue is the difference
between the selling price and par or
face value adjusted for time.
ØIf sold prior to maturity in secondary
market
ØYield based on the difference between
price paid for T-bill and selling price
adjusted for time
 Money Market Securities
•

•
C o m m e rcia lPa p e r
ØShort-term debt instrument
ØAlternative to bank loan
ØDealer placed vs. directly placed
ØUsed only by well-known and
creditworthy firms
ØUnsecured
ØMinimum denominations of $100,000
ØNot a large secondary market
 Money Market Securities
ØCommercial paper backed by bank
lines of credit
ØBank line used if company loses credit
rating
ØBank lends to pay off commercial
paper
ØBank charges fees for guaranteed line
of credit
Money Market Securities
Ø
N e g o tia b le C e rtifica te s o f D e p o sit
Ø
Ø ( NCD )
ØIssued by large commercial banks
ØMinimum denomination of $100,000 but $1
million more common
ØPurchased by nonfinancial corporations or
money market funds
ØSecondary markets supported by dealers in
security
 Money Market Securities
ØNCD placement:
ØDirect placement
ØUse a correspondent institution
specializing in placement
ØSell to securities dealers who resell
ØSell direct to investors at a higher
price
ØNCD premiums:
ØRate above T-bill rate to compensate
for lower liquidity and safety
Money Market Securities
Ø
Ø
R e p u rch a se A g re e m e n ts
ØSell a security with the agreement to
repurchase it at a specified date and
price
ØBorrower defaults, lender has
security
ØReverse repo name for transaction
from lender
ØNegotiated over telecommunications
network
ØDealers and brokers used or direct
Exhibit:-
1 Purchase Order

Importer Exporter
5 Shipment of Goods
L/C (Letter of Credit) Application

Shipping Documents & Time Draft

L/C Notification
2
4 6

3 L/C

American Bank Japanese Bank

(Importer’s Bank) 7 Shipping Documents &Time Draft (Exporter’s Bank)
Draft Accepted (B/ACreated)
 Money Market Securities
Ø
Ø B a n ke rs A cce p ta n ce
ØA bank takes responsibility for a
future payment of trade bill of
exchange
ØUsed mostly in international
transactions
ØExporters send goods to a foreign
destination and want payment
assurance before sending
ØBank stamps a time draft from the
importer ACCEPTED and obligates
Money Market Securities
◦
◦ B a n ke rs A cce p ta n ce
◦ Exporter can hold until the date or
sell before maturity
◦ If sold to get the cash before
maturity, price received is a
discount from draft’s total
◦ Return is based on calculations for
other discount securities
◦ Similar to the commercial paper
example
Major Participants in Money
Market
Participants
◦ Commercial banks
◦ Finance, industrial, and service
companies
◦ Federal and state governments
◦ Money market mutual funds
◦ All other financial institutions (investing)
Short-term investing for income and
liquidity
Short-term financing for short and
permanent needs
Large transaction size and
18
Valuation of Money Market
Securities
Present value of future cash
flows at maturity (zero coupon)
Value (price) inversely related to
discount rate or yield
Money market security prices
more stable than longer term
bonds
Yields = risk-free rate + default
risk premium

19
 Exhibit :-
International U.S. U.S. U.S. Issuer’s Issuer’s
Economic Fiscal Monetary Economic Industry Unique
Conditions Policy Policy Conditions Conditions Conditions

Short-Term
Risk-Free Risk
Interest Premium
Rate of Issuer
(T -bill Rate)

Required Return
on the Money
Market Security

Price of the
Money Market
Security
 Interaction Among Money
Market Yields
ØSecurities are close investment
substitutes
ØInvestors trade to maintain yield
differentials
ØT-Bill is the benchmark yield in money
market
ØYield changes in T-bills quickly impacts
other securities via dealer trading
ØYield differentials determined by risk
differences between securities
ØDefault risk premiums vary inversely
with economic conditions 21
 Globalization of Money
Markets
ØMoney market rates vary by country
ØSegmented markets
ØTax differences
ØEstimated exchange rates
ØGovernment barriers to capital flows
ØDeregulation Improves Financial
Integration
ØCapital Flows To Highest Rate of Return

22
 Globalization of Money
Markets
ØPerformance of international securities
ØEffective yield for international securities
has two components
ØThe yield earned on the investment
denominated in the currency of the
investment
ØThe exchange rate effect
FOREX
 Forex Market
ØCurrency is ultimate commodity
ØLargest Market in the world
ØLarger than all U.S. Markets
ØLarger volume than all World Markets
Ø97-00 $5B to $1.5Trillion Daily Volume
ØBefore Internet use…only Corporations
and wealthy could trade
 WHY TRADE FOREX?
Ø24 Hours a Day trading
Ø100:1 Margins
ØUse all the same market tools
ØOCO
ØLimits
ØStops
ØNo short selling (1 uptick rule)
Currency Pair
(Example)

ØBase Currency
Ø
ØQuote Currency
Ø
ØBid Price
Ø
ØAsk Price
 Disadvantages to FOREX
ØNot easy to learn
ØMost lose a lot of $$ at first before
learning how it works
ØHard to find big Long-Term trends for the
conservative & passive trader
ØBetter if you are a S/T Trader to take
advantage of big margins
 Advantages to FOREX
ØOnly trade in a few major currencies not
thousands of Stocks
ØFlexible trading hours (24 hours / Day)
ØMinimal starting investment - $1000
ØLow transaction costs - $15 / Turn
ØMake money in both rising and falling
markets
• THANK YOU