2. Definition: The money markets are wholesale
financial markets in which soverign
states, banks and major corporations raise
funds through certain types of loans or by
issuing debt securities.
Many of the securities issued are negotiable
and actively traded in a secondary market by
investors and intermediaries worldwide
3. Commercial Banks
Brings together borrows and investors
Links with interest rate
December 2004 was $8.2 trillion, compared
with $6 trillion in 2001 and $4 trillion at the end
of 1995
Investors in US money-market funds, which
had $1.8 trillion in assets in 2005, own nearly
one-quarter of all the money-market
instruments in the world
4. Pools and Diversify Risk
Retail
Institutional
They have come recently
No branches, accept small accounts and they
don't need to meet such high demand from
customers
5. The value of money-market securities changes
inversely to changes
Investors in the money markets also utilise
futures contracts on money market rates for a
variety of purposes, including hedging and
cash management.
6. Various type of discount bills
Promissory notes
Certificates of deposits and bonds
Short-term deposits
Although they are strictly non-negotiable
They can be sold and bought as if they were
7.
8.
9. There is no physical trading floors for money
market instruments
Participants are from all around the world
With 24 hour communication it is difficult to
exploit the cost of money in different financial
centres
Large institutional investors monitor the
returns available in each market and can switch
instantaneously into higher yielding assets
10. New York
By far the largest money centre
Difficult to quantify
Because of it's colossal size and openness
developments in the US money markets have
immediate repercussions in the rest of the world
London
Principal base for Eurocurrency operations
Tokyo
11. Money markets cover debt instruments with
maturities of up to 12 months
Capital markets deal with longer dated
securities.
How the interest is paid makes a big difference
to the way debt securities are valued
Various derivative products sit inside or on the
12 month barrier. (interest rate fucture
contracts are now traded out to seven years)
12. Discount bills: the interest rate that the Federal
Reserve charges banks for short-term loans.
This establishes a de facto floor for the interest
rate that banks charge their customers, usually
a little above the discount rate.
Promissory notes: a written contract to pay
money to a person or organization for a good
or service received.
13. I used a great book for this presentation:
Mastering Foreign Exchange and Money
Markets: A Step-by-Step Guide to the
Products, Applications and Risks
Link: http://www.amazon.com/Mastering-
Foreign-Exchange-Money-
Markets/dp/0273625861
I also used the course book for this
presentation which can be found on the
Facebook page
Editor's Notes
Financial intermediaries: channelling funds between surplus and deficit agents. For example a bank that transforms bank deposits into bank loans.
Banks were the main source of credit for both businesses and consumers For the law students Monetary Control Act of 1980 in the United States meant that the rate of interest would be set by market forces i.e supply and demand instead of regulators. Do not operate according to a single set of rules The central bank decides to set the short-term interest rate which in turn determines the supply and demand in the marketDoubling Less active money markets implies that the country will have less active bond markets
pools money-market securities, allowing investors to diversify risk among the various company securities in the fundIndividualsCorporations, bug investors and foundationsable to perform the role of intermediation at much lower cost than banksspread between the rate money market funds pay investors and the rate at which they lend out these investors’ money is normally a few tenths of a percentage point rather than 2–4 percentage point spread between what banks pay depositors and charge borrowers.
Because money-market instruments by nature are short term, their prices are much less volatile than the pricesof longer-term instruments, and any loss or gain from holding the security in the short time until maturity rather than investing at current yields is smallBy buying or selling a futures contract on a short-term interest rate or a short-term debt security, an investor can profit if the relevant rate is above or below the chosen level on the contract’s expiration date
It is similar to FX markets, trading takes place over the phone (if your old school) and electronically. The prices are updated with electronic news feed and price information
Except for some marketsi.e derivative products, which you shall meet later on the course via Josh these are traded in organized exchanges.
You might have heard of the saying America coughs, the whole world catches a cold
You are probably wondering why a 12-month barrier exists between the two this is because in the wholesale market interest on loans maturing inside the 12 month period are typically paid in “bullet form”, i.e in one chunk when the loan matures. Longer debt tends to be paid in instalments or “coupons”You are also wondering what derivative products are they are synthetix instruments whose market prices are derived from underlying “cash” securities;
