1(a)(i) reason of BNM take remedial action of drain the excess liquidity is because the downward

pressure on the target interest rate resulting from intense inter-bank lending as indexed to KLIBOR. The
target interest rate is reflected by the Overnight Policy Rate (OPR). The issuance of BNMN, therefore,
would act as the primary wave of liquidity management to "mop up" excess reserves from the financial
system. With excess liquidity, it does not solve the liquidity problem, but are a heavy financial burden
for the country.

The impact if its action on interest rates prevailing in the local money market

(ii) Sept 2018

(b)(i) The bid rate is the maximum rate in the market which buyers of stock are willing to pay in order
to purchase any stock or the other security demanded by them. For example, if the current price
quotation for security A is $10.50 / $10.55, investor X, who is looking to buy A at the current
market price, would pay $10.55

The offer rate is the minimum rate in the market at which sellers are willing to sell any stock or
the other security which they are currently holding. For example, if the current price quotation
for security A is $10.50 / $10.55, investor Y who wishes to sell A at the current market price
would receive $10.50.

(ii) qualities of two-way quote and discuss the rationale

(iii) don’t know

(c)(i) Transaction is Monday 2 April 2018; the value date is Tuesday 3 April 2018. The fund is required for
1 day, so deal is considered tomorrow next fund (T/N). Thus, the mature date will be on Wednesday 4
April 2018.

Transaction is Monday 2 April 2018; the value date is Wednesday 4 April 2018. The fund is deal with spot
next fund (S/N). Thus, the mature date will be on Thursday 5 April 2018.

(ii) The advantages of using money market deal are it lock in interest rate and secured the funds for one
day in advance (T/N). For the spot nest fund (S/N), it takes advantage of limit orders and stop losses. If
time is not an issue and a firm is either aiming for a price or doesn’t want to fall below another, these
products are useful as they can be triggered 24 hours a day, also allowing companies to take advantage
of short currency spikes. The reason of square off bank’s Nostro Account is to avoid paying expensive
overdraft charges if the account in deficit. If the account is in surplus, the dealer have to ensure that the
currency to be lend out to earn interest.

(iii) Transaction is Monday 2 April 2018; the value date is Tuesday 3 April 2018. The fund is required for 1
day, so deal is considered tomorrow next fund (T/N). Thus, the mature date will be on Wednesday 4
April 2018.
Principle: USD300,000,000
Interest: USD300,000,000 x 3.25% x 1/360 =USD27083.33
Repayment: USD300,000,000 + USD27083.33= USD300,027,083.33

Transaction is Monday 2 April 2018; the value date is Wednesday 4 April 2018. The fund is deal with spot
next fund (S/N). Thus, the mature date will be on Thursday 5 April 2018.

Principle: USD200,000,000
Interest: USD200,000,000 x 3.25% x 1/360 =USD18055.56
Repayment: USD200,000,000 + USD18055.56 =USD200,018,055.56

(iv) “Month end/month end” is when the spot value dates falls on a month end (i.e. last good business day
of the month), the maturity of the respective tenure will fall on their respective month end. For example,
if the month end value spot is 31 March, then the maturity date for a 6 month deposit will be 30
September. We expect that 30 September is a holiday or Sunday, the maturity date should be 28
September (29 September is Saturday and it is not a good business day). However, if the month end
maturity date is not a good business day, market convention is to bring the maturity date backward to the
next available good business day and not push the maturity date forward. For example, if 29 and 30
September is not a good business day, then the maturity date will be brought backwards to 28 September
rather than 1st October due to no crossing over month end.

2(a) same as Jan 2020 Q1 (b)

(b)(i)

(ii)

3(a)(i) There are two general types of bank deposits: demand deposits and time deposits. Demand
deposits are the placement of funds into an account that allows the depositor to withdraw his or her
funds from the account without warning or with less than seven days' notice. Checking accounts are
demand deposits. They allow the depositor to withdraw funds at any time, and there is no limit to the
number of transactions a depositor can have on these accounts (although this does not mean that the
bank cannot charge a fee for each transaction).

A time deposit is an interest-bearing deposit held by a bank or financial institution for a fixed term
whereby the depositor can withdraw the funds only after giving notice. Time deposits generally refer to
savings accounts or certificates of deposit, and banks and financial institutions usually require 30 days'
notice for withdrawal of these deposits. Individuals and companies often consider time deposits as
"cash" or readily available funds even though they technically are not payable on demand. The notice
requirement also means that banks may assess a penalty for withdrawal before a specified date. Time
deposits may pay higher interest rates than demand deposits.

(ii) A currency swap is a cash flow management tool that is quite popular with businesses that
have foreign currency inflows and outflows at different or unexpected dates. A currency swap is
a transaction in which two parties agree to exchange a fixed amount of one currency for
 another. A first exchange of the two currencies occurs at the initiation of the swap contract.
Typically, this first exchange is often based on prevailing spot exchange rates at the time. This
initial exchange is then reversed at the end of the swap contract period. Since the amounts
exchanged in both periods are exactly the same, exchange rate risk is eliminated. For
illustration,

MISC (Malaysia company), with operations in Matsushita (Japanese firm) with operations in
Japan wishes to expand its warehousing Malaysia wants to expand its facilities in
facilities in Yokohama. The cost of the Malaysia. The estimated cost of the expansion
expansion will be 100 million ¥en. Its banker in is RM10 million. Matsushita’s banker in
Japan, The Bank of Tokyo is willing to provide Malaysia, Maybank is willing to provide a
the financing on the following terms: RM10 million loan on the following terms:
Principal Amount= ¥en 100 million Principal Amount= RM10 million
Loan Tenor = 5 years Loan Tenor = 5 years
Interest = fixed 5%; (¥en 5 million) Interest = fixed 8%; (RM800,000)
To avoid these problems both MISC and Matsushita could take the foreign currency loans they
are being offered and then enter into a currency swap in order to overcome the exchange rate
risk. To see how the swap can be structured; assume that the spot exchange rate between the
¥en and the Ringgit is 10 ¥en per Ringgit. To lock-in the prevailing exchange and avoid currency
risk on both the principal and interest payments over the next 5 years, they can undertake the
swap as follows. MISC takes the loan principal of 100 million ¥en from Bank of Tokyo and
forwards it to Matsushita, which in turn gives MISC the RM10 million it received from Maybank.
These principal amounts are reversed at the end of the 5th year. In addition, at the end of each
year, MISC gives RM800,000 being 8% interest on RM10 million to Matsushita which in turn
gives ¥en 5 million as (5%) interest on the ¥en loan. Each company simply passes on the
payments received to their respective banks as fulfillment of their obligation

(iii) A currency option may be defined as a contract between two parties (buyer and seller) whereby the
buyer of the option has the right but not the obligation, to buy or sell a specified currency at a specified
exchange rate, at or before a specified date, from the seller of the option. While the buyer of option
enjoys a right but not obligation, the seller of the option nevertheless has an obligation in the event the
buyer exercises the given right. An option is a bit like insurance that a buyer takes out against
unfavourable currency movements, and as with insurance policies, the option buyer must pay a
premium. A call option protects importers against potential currency appreciation, while the put option
protects exporters against currency depreciation. In hedging using options, calls are used if the risk is an
upward trend in price and puts are used if the risk in a downward trend in price. In our Bumiways
example, since the risk is a depreciation of Rupees, Bumiways would need to buy put options on Rupees.
If Rupees were to actually depreciate by the time Bumiways receives its Rupee revenue then Bumiways
would exercise its right and exchange its Rupees at the higher exercise rate. If however Rupees were to
appreciate instead, Bumiways would just let the contract expire and exchange its Rupees in the spot
market for the higher exchange rate. Therefore the options market allows traders to enjoy unlimited
favourable movements while limiting losses.
(b) areas of effective management of currency risk which must covered in Report (don’t know)

(c) risks which a bank would need to address if enters into one month fixed forward delivery contract
with another bank domiciled in Africa and the transaction involved in an exotic that is not commonly
traded in foreign exchange market

- transaction risk

- economic risk

- exchange rate risk

4(a)

Trade Trade executed Rate @ Net FX position & Breakdown rate

1 Sold 25mil USDMYR 4.2550 Short 25mil @ 4.2550
2 Sold 10mil USDMYR 4.2569 (25x4.2550) + (10x4.2569) = 4.2555
35
3 Bought 26mil USDMYR 4.2545 (35x4.2555) - (26x4.2545) = 4.2586
9
4 Sold 8mil USDMYR 4.2570 (9x4.2586) + (8x4.2570) = 4.2578
17
Day end: short 17mil USDMYR @ 4.2578

End of the day net FX position: short of 17mil USDMYR @ 4.2578 (average cost)
Revalue at midrate = (4.2554+4.2560)/2
= 4.2557
Dealer will buy 17 million USDMYR from the revalue rate at 4.2578,
Thus, dealer make a profit of (4.2578-4.2557) x USD 17,000,000 = RM35700

(b) Option 1: Square all the position at day end, buy 17 million USD in the market (buy at market’s offer
rate)

Option 2: Cover part of the position and leaving the rest overnight. Assuming the dealer wants to leave 7
million USD overnight and buy 10mil USD in market. The bank will revalue the remaining 7million short
USDMYR and see if they have a revaluation profit or loss.

Option 3: Keep position and leave it overnight if expect USD depreciate.

Max loss =RM50,000

Stop loss rate = 50,000 / 17,000,000 = 0.0029 points plus 4.2578=4.2607

When USD strengthen and hits 4.2607, dealer buys back and suffer loss of USD17,000,000 x (4.2578-
4.2607)= - RM49300
5(a)(i) Leading indicator accelerate transaction and payment. It happens when firms or individuals
making payments expect their currency to appreciate follow by depreciation on settlement date. Pay
less if makes early payment. For example, the exchange rate for Nestle Malaysia and Nestle USA is
USD1:MYR4.50. So, when USD1:MYR5.00, Nestle Malaysia will make payment early because if the USD
appreciates, Nestle Malaysia will have to pay more.

Lagging indicator delay transaction and payment. Firms or individuals making payments will delay
payment if they expect their currency to depreciate. Hope to minimize losses due to depreciating
exchange rates by delaying payment until currency appreciates in future. For example, the exchange
rate for Nestle Malaysia and Nestle USA is USD1:MYR4.50. So, when USD1:MYR4.00, Nestle Malaysia will
delay payment because if the USD depreciates, Nestle Malaysia will have to pay more.

(ii) The foreign exchange risk shifting refers to transfer of risk to another party. Risk shifting has many
connotations, the most common being the tendency of a company or financial institution facing financial
distress to take on excessive risk. For example, risk sharing can be an alternative of risk shifting. When
the company is faced with a positive risk, it agrees to partner with other parties to increase the odds of
the risk happening. The company also agrees to share the benefits and burden of loss that arise from the
opportunity when the risk occurs.

When undertaking a large project, a company can share the risk with other participants in a mutually
beneficial partnership. For example, let’s say ABC Limited specializes in road construction, but it lacks
the capacity to carry out large projects. To address the insufficiency, ABC collaborates with its
competitor XYZ Corp. to pool their resources to bid for a large road construction contract. If awarded
the contract, both companies stand to benefit from the proceeds of the contract.

(b)(i) Counterparty risk is the likelihood or probability that one of those involved in a transaction might
default on its contractual obligation. Counterparty risk can exist in credit, investment, and trading
transactions. In other words, counterparty risk also known as default risk. For example, if the borrower
has a low credit score, the creditor will likely charge a higher interest rate or premium due to the risk of
default on the debt. Credit card companies, for example, charge interest rates in excess of 20% for those
with low credit scores while simultaneously offer 0% interest for customers that have stellar credit or
high credit scores. If the borrower is delinquent on payments by 60 days or more or exceeds the card's
credit limit, credit card companies usually tack on a risk premium or a "penalty rate," which can bring
the interest rate of the card to over 29% annually

(ii) Settlement risk is the possibility that one or more parties will fail to deliver on the terms of a contract
at the agreed-upon time. Settlement risk is a type of counterparty risk associated with default risk, as
well as with timing differences between parties. Settlement risk is also called delivery risk or Herstatt
risk. For example, the bank had taken in its foreign-currency receipts in Europe but had not made any of
its U.S. dollar payments. When German banking regulators closed the bank down, the event left
counterparties with substantial losses.
(c) A negative gap is a situation where a financial institution's interest-sensitive liabilities exceed its
interest-sensitive assets. A negative gap is not necessarily a bad thing, because if interest rates decline,
the entity's liabilities are re-priced at lower interest rates. In this scenario, income would increase.
However, if interest rates increase, liabilities would be re-priced at higher interest rates, and income
would decrease. what mm condition that bank used?