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Money Market Instruments In Pakistan

Group Number : 9 Umair Aziz Roll # 47

Money Market
The money market exists for the purpose of

issuing and trading of short-term instruments, that is, instruments where the term remaining from the date when trading takes place to the date of maturity, is of a short-term

nature.”

Characteristics Of Money Market Instruments
• Short-term borrowing and lending
• Low credit risk • High liquidity • High volume of lending and borrowing

INSTRUMENTS IN PAKISTAN!
• Treasury Bills
• Commercial Papers • Repurchase Agreements • Banker’s acceptance • Eurodollar Deposits

• Federal Funds

” • A treasury bill differs from other types of investments in that they do not pay interest in the traditional way. he buys it at a discount rate.Treasury Bills • T-bills are the Government debt securities that matures in one year or less from their issue date. . When an investor wishes to purchase a treasury bill.

Features • Issued through bidding process • Zero Coupon bonds sold at a discount to their face values • Purchased by individuals. institutions and corporate bodies including banks irrespective of their residential status • Can be traded freely in the country’s secondary market. Physical delivery could be affected if required .

Types of T-Bills • They are issued with the maturities of 12-months (one-year) 6-months (24Weeks) 3-months (12-Weeks) .

Securities can be liquidated when ever the holder wants Minimum denomination • T-bills are trade on the face value of Rs. so they have minimum default risk. Default risk Liquidity • T-bills are highly liquid instrument of financial market.Investment Characteristics Of Treasury Bills • T-bills are on the guarantee of government.100 in Pakistan and in denominations of multiples of 100 .

treats the par value as the investment base uses a 360-day year for simplicity .How to calculate return on T-Bills? • T-Bills are sold at a discount from their par value •Yield is based on their appreciation in price b/w time of issue time they mature or are sold by the investor • Bill yield are determined by the discount method.

• Suppose you buy a 12 Weeks T-bill at Rs.98 and keep it until maturity having face value of rs. Then the discount rate on this bill can be calculated as: .100.

 Primary dealers were appointed.  The role of primary market restrict to fortnightly auctions.How T-Bills are traded in Pakistan? At start Treasury bills were issued on fixed rate. six months at 6 percent per year In April 1991  Introduce the American-style auction-based system. eg. .

Auction System Open Market Operations(OMO) .State Bank of Pakistan use following two methods to trade T-bills.

After one or two days of finalizing price. securities are issued.Auction System SBP announces the T-Bill auction Primary dealers submit the bids After the submission deadline. bids will open MOF decides the cut off price. .

.OPEN MARKET OPERATION • In OMO Government fix the discount rate before the announcing the new securities and can be issued when they need funds. • Through OMO Government can sell as well as buy back securities. • Trading T-Bills in OMO is mainly to control the circulation of money in the market.

COMMERCIAL PAPER .

unsecured promissory notes issued by well-known companies carrying high credit rating • Used to meet immediate cash needs • Funds raised from commercial paper are commonly used for current transactions • SBP and SECP started process of creating commercial paper market in Pakistan in 2003 .Commercial Paper • Short-term.

Maturity Period • Between 30 days and one year from the date of subscription .

Issuer Of Commercial Paper • Highly rated companies and financial institutions with minimum equity of Rs. 100 million • Minimum current ratio of 1: 1 and debt/equity ratio of 60: 40. • Minimum credit rating of the issuer shall be “A-” • No overdue loan or defaults .

100.000 or in multiples thereof .10 million • In case of private placement.Size And Denomination • Minimum size of the issue of commercial paper shall not be less than Rs. CP would be denominated in Rs. CP may be denominated in Rs.000 or in multiple thereof • In case of offer to general public. 5.

KIBOR and issuer’s credit rating .Mode Of Issue And Discount Rate • In the form of a promissory note • Discount to face value is determined by the issuer keeping in view the prevailing T-bill rates.

Calculation Of Rate Of Return DRcp = (Par Value – Purchase Price) / Par Value x 360 / Days to Maturity .

Investor of Commercial Paper • Can be issued by way of Public offer and/or to Scheduled Banks • Large Institutions as the issue size is often too high for individual investors .

Advantages For Investor • Higher yields than time deposits • Safe investment .

REPURCHASE AGREEMENT .

Repurchase Agreement • Repurchase agreements are agreements between a borrower and a lender • Borrower sells securities to the lender with the stipulation that the securities will be repurchased on a specified date and at a fixed price and interest • Securities serve as collateral for loan .

Term repos 3. Open repo . Overnight repos 2.Types Of Repo (In Term of Maturity) 1.

Large banks. non-financial corporations. insurance companies. and large banks • Active lenders include state and local governments.Major Borrowers And Lenders • Major borrowers include government bond dealers of Treasuries and federal agency securities. and foreign financial institutions • Government securities are the main collateral for most repos .

Repo Interest Income • The difference between the underlying securities current price and repurchase price is the amount of interest paid by the borrower to the lender RP Interest income = Amount of loan x Current Repo Rate x (Repo Term in days/360 days) .

.Purpose of Repo • To meet deposit reserve requirements • In order to purchase interest bearing securities • Companies lend to avoid losing even a single day’s interest.

Advantages Of Repo • Repo rate is less than borrowing from a bank • Benefit to lenders is that the maturity of the Repo can be precisely tailored to the lender's needs .

BANKER’S ACCEPTANCE .

Banker’s Acceptance • Acceptance means a vow to pay a definite amount of money • The person who will pay is called as the promissory while the one who will receive is the beneficiary .

Requirements of the Time Draft • Promissory Signature • The word accepted on top of his signatures and • The date on which the amount will be paid. .

Banker’s Acceptance • If the time draft is formally accepted by a bank then it becomes a banker’s acceptance • The maturities of banker’s acceptance mostly range from 30 to 180 days • The promissory uses the bank’s credit worthiness instead of his own .

Mechanism of Banker’s Acceptance Importer Importer’s Bank Acceptance Manufacturer .

Mechanism of Banker’s Acceptance Letter of Credit Time Draft Accepted Discounted .

. • It is sold at a discount from the value which will be payable on maturity.Secondary Market for the Banker’s Acceptance • The issuing bank can either keep it in his portfolio or sell the bankers acceptance in the money market.

Secondary Market for the Banker’s Acceptance The net proceeds after the sale = The face amount of the acceptance – the discount rate (interest rate*days into maturity*face amount) .the bank’s acceptance commission The combination of these is called the “all in” rate. .

EURODOLLAR DEPOSITS .

• Generally. . the "euro" prefix can be used to indicate any currency held in a country where it is not the official currency. • The Eurodollar deposits are always moving in the form of loans.Eurodollar Deposits • Eurodollars are the deposits of US dollars in banks which are located outside United States.

Mechanism of Eurodollar Deposits Dealer In Pakistan Gets Shipment Amount in Dollars Deposited in a Bank Situated in US Amount in Dollars Transferred to a Bank Situated In Pakistan .

. • Many are held for one month that is the usual time period for the shipment of goods.Eurodollar Deposits • The chain of Eurocurrency and Eurodollars will remain functioning until they are in demand. • There is no central location for the trading of the Eurocurrency deposits.

• Difference of Interest rate • Changes in Currency Value • Political Risk .Eurodollar Deposits • They are volatile and sensitive to fluctuations in interest rates and currency values.

Eurodollar Deposits Daily Cost of Funds derived from Eurodollars: Amount to be loaned * interest rate * 1/360 .

FEDERAL FUNDS .

Federal Funds • Federal funds refer to the overnight borrowings which are undertaken in order to meet the state bank’s reserve requirements. • The funds are not physically transferred. • Commercial banks are the principle borrowers .

• Borrower’s need of funds is fulfilled while the lender earns interest income on his funds. .Federal Funds • Meet the Legal Reserve Ratio requirement. • Interest rates highly fluctuate daily depending on the volume of funds which are surplus in the market and the volume of fund needed by the market.

QUESTION & ANSWER SESSION .