Topic 3 Money and foreign exchange market

MFK FIN536 Topic 3

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At the end of the lessons, students should be able to: 

Understand the development and structure of money market. Understand the operations, risks and the participants of money market. Differentiate between the two categories of money market operations. Describe the financial instrument available in the money market and understand simple calculation of the instruments. Identify the risk in money market and how to control the risks

MFK FIN536 Topic 3

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Movement of funds among the surplus and the deficit unit. Provide liquidity – buying and selling of money market instruments. Invest and trade in variety of short-term debt instruments. Over-the-counter and exchanges. Activities: lending and borrowing of funds. Backed by an active secondary market.
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Test 1 On 13/08/09 Topic 1, 2 and 3 8.00 pm to 9.30 pm AC572

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Provide facilities for adjusting portfolio over the short term. For government: implement monetary policy and funding of debts. Short term mobilization of funds among market participants. Market for trading financial instruments among the SU and DU in the financial system. Maturity – overnight to one year.

MFK FIN536 Topic 3

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Derived from the activities of borrowing and lending funds in the professional inter-bank market. As the rate is arrived at objectively, the KLIBOR is used by some banks as a benchmark for pricing loans to corporate bodies as well for the pricing of other money market instruments.

MFK FIN536 Topic 3

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New interest rate framework announced by BNM in April 2004. Indicator of the monetary policy stance and at the same time as the target rate for the day-today liquidity operations of BNM.

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Prior to 1987. During 1987. Government promote secondary market
◦ ◦ ◦ ◦ Set up cheque clearing system Reduce SRR and MLR Include well capitalized finance companies Introduced KLIBOR: anchor rate

1989.

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In 1990: Central Bank introduced

◦ Electronic fund transfer, SPEEDS and RAM

1993: total 21 Islamic financial products. 1994: full fledged Islamic Banking system. 1995, established Malaysia Rating Corporation Berhad. 1996: introduced FAST.

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Banks borrow money from this market. Why?
◦ Do not have sufficient deposit base to fund loans operations ◦ To meet statutory reserve & minimum liquidity requirements

Activities:

◦ Rediscounting of money market papers.

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Example: ◦ CIMB Bank needs RM100 million for a period of one month. ◦ Obtained directly from other bank in the same tenor. ◦ MBB place FD with CIMB. ◦ Rate is agreed by both party.

Credit limit/ credit line.

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Conduct in a securities market. i. outright sale/purchase of instrument ii. Repurchase Agreement (REPO) market Deficit >>> Surplus>>>

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Trading of short term funds among MM players. Standard deals in interbank market:
◦ Overnight money ◦ 7-day money ◦ Money for 1,2 and 3 months

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A borrower not able to make payment on the agreed maturity date. Managing the credit risk:◦ Credit limit.

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Bank not able to have easy access to funds in the market. Not able to convert existing assets into cash at a reasonable market price. Managing the liquidity risk:◦ Portfolio – mixture of short-term and long-term instruments.

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Bank’s revenue is adversely affected by the fluctuations in interest rates. Managing the interest rate risk:◦ Monitor and predict interest rates movement.

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Bad operational system of the parties in the money market. For example poor IT system, reporting system and inexperience and incompetence personnel. Managing the operational risk:◦ ◦ ◦ ◦ Invest in a suitable system. Training and development. Compensation Conducive working environment.

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At the end of the lessons, students should be able to: 

Understand the development and structure of money market. Understand the operations, risks and the participants of money market. Differentiate between the two categories of money market operations. Describe the financial instrument available in the money market and understand simple calculation of the instruments. Identify the risk in money market and how to control the risks

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Foreign exchange market.

MFK FIN536 Topic 2

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THANK YOU…
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