Dipanjan Biswas EMP Batch-34, Roll No-05

Call money Market

The call money market deals in short term finance repayable on demand, with a maturity period varying from one day to 15 days. Unsecured over the counter trade

Highly volatile interest rate known as call rate. Depends entirely on demand and supply of call loan

Commercial banks, both Indian and foreign, co-operative banks, Discount and Finance House of India Ltd.(DFHI), Securities trading corporation of India (STCI) participate as both lenders and borrowers and Life Insurance Corporation of India (LIC), Unit Trust of India(UTI), National Bank for Agriculture and Rural Development (NABARD)can participate only as lenders.

Banks borrow in the call money market for following purposes: 1. To fill the gaps or temporary mismatch in funds 2. To meet the CRR & SLR mandatory requirement 3. To meet sudden demand of funds arising out of large outflows

Many a times banks and other institutions run asset liability mismatch such as having cash surplus with long term liabilities and lacks assets. Thus they have to lend overnight resulting in lesser returns on funds. If they lend in overnight market their return will be low, if they invest in assets their funds will be locked. Such cash flow characteristics are calles ALM or Asset Liability Mismatch and it runs the

risks of fluctuations in overnight rate. Such situation will call for hedging through Interest Rate Swapping. Cash flow in a swap will look like the following: Sttart Date 1st July 2011 End Date 1st Jan 2012 Notional principal Rs 1000000 Corporate A pays at NSE MIBOR and swaps for fixed Corporate A pays 3 months NSE MIBOR and recvs 7.5% fixed. Interest payment date 1st Oct and 1st Jan. MIBOR 1st 3 months 7.75%. Next 3 months 7% 1st July 2011 1st Oct 2011 1st Jan 2012 Net Recvs

-630 1260 630

Interest Rate Swaps can possibly reduce potential returns. Take example of an institution which receives short term deposits and uses that fund for fixed mortgages. If such firms go for fixed-for-floating interest rate swapping and interest rate declines it'll generate loss for them. This is the reason why many firms do not opt for IRS even if they are exposed to interest rate risk. There are otherv reasons as well. Many firms look at the potential risks like one parties inability to pay (credit risk) or sovereign risk (Swap may not just work because of political

Repo Market
There are three types of repo maturities: overnight, term, and open repo. Overnight refers to a one-day maturity transaction. Term refers to a repo with a specified end date. Open simply has no end date. Although repos are typically shortterm (around 15 days), it is not unusual to see repos with a maturity as long as two years. Collateralised borrowing/lending Repo Rate and Reverse Repo Rate creates the band in which overnight call money rate moves. If the band is shrunk volatility of call money rate will reduce

There are two types of Repos 1. Inter Bank Repo 2. RBI Repo Players like Banks, Primary Dealers, Mutual Funds and Financial Institution can participate Repos have traditionally been used as a form of collateralized loan . For the buyer, a repo is an opportunity to invest cash for a customized period of time (other investments typically limit tenures). It is short-term and safer as a secured investment since the investor receives collateral. Market liquidity for repos is good, and rates are competitive for investors. Money Funds are large buyers of Repurchase Agreements. For traders in trading firms, repos are used to finance long positions, obtain access to cheaper funding costs of other speculative investments, and cover short positions in securities.

mismatch such as having hey have to lend overnight

ey invest in assets their funds

y Mismatch and it runs the

ake example of an institution ed mortgages. If such firms go declines it'll generate loss for

hey are exposed to interest rate

ential risks like one parties ust work because of political