Money market


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Money market

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Money market

  1. 1. Presented ByMuhammad Khaliq –Uz- Zaman
  2. 2. Academic Background: BBA &MBA from Bahria University. Professional Qualification: CFA Level I Exam. ACI Certified Treasury Dealer. JAIBP from Institute of Bankers Pakistan. Prospective Qualification: MS Economics From IBA
  3. 3.  What is treasury? What is Money Market? Money Market Classification. Money Market Instruments. Money Market Transaction. Tools for Monetary Management.
  4. 4. It is the department of any Bank or a financial institution which performs duty of Fund Management Asset and Liability Management
  5. 5.  The money market (“MM”) is a wholesale market for low risk, highly liquid, short-term debt instruments It serves as an avenue through which banks and financial institutions can offload their excess liquidity or meet their short-term funding requirements. To the government an organized MM represents a means for it to implement it’s monetary policies in an efficient manner. Moreover, it provides it with a liquid market for securities through which it can finance it’s own borrowing requirements.
  6. 6.  Primary Market Secondary Market
  7. 7.  The primary market constitutes the government of Pakistan selling its securities through the State Bank of Pakistan by carrying out auctions Through these auctions the government invites bids for its Treasury Bills in fixed tenors of 3, 6 and 12 months and Pakistan Investment bonds in 3, 5,7, 10, 15 and 20 Years A pre-auction target is announced in advance. (Quarterly Targets for T-Bills and Half yearly for PIB’s) All GoP securities are issued to Primary Dealers (PD) appointed by the State Bank only.
  8. 8.  The securities issued in the primary market are then traded in the secondary market, which constitutes the various financial institutions trading among themselves through brokers or directly The securities once sold to the PDs may be bought by non-PD banks,Corporates,MM Mutual Funds, Pension Funds, Insurance Companies etc in the secondary markets The two markets are linked in the sense that the rates at which bids are accepted in the auction have a direct bearing on the rates prevailing in the secondary market.
  9. 9.  Treasury Bills. Pakistan Investment Bonds (PIB’s). Term Finance Certificates. GOP Ijarah Sukuk.
  10. 10.  They are zero-coupon bonds issued at a discount, have a par value of Rs 100 and a maturity of three, six or twelve months. T-Bills are short term securities issued by the State Bank on behalf of the Ministry of Finance through auctions or OMOs (Open Market Operations).
  11. 11.  Price = _____100________ (1+ __i__*DTM) 365 DTM=Days to Maturity i= Interest rate
  12. 12. The price of T-bill with 84 days to maturity and currently trading at 13.15% in MM = _______100________ (1+13.15/36500*84) = 97.06
  13. 13. o Measurement of Interest rates  Interest rate can be defined as price of credit or return to capital. Interest rate can be measured through: u Yield to Maturity (YTM) – this equalizes current market value of a loan or security with the expected future income such loan could generate. The YTM is calculated as : n E (CFt ) Vn PV = ∑ + t =1 (1 + YTM ) t (1 + YTM ) n Or n Pmt t FVn PV = ∑ + (1) t =1 (1 + I ) t (1 + I ) n Where PV = current market value of asset CF = expected cash flow FV = Expected value of asset at maturity I = market interest rate
  14. 14. II. Bank discount rate (DR) – the rate usually quoted on short- term loans and government securities. This calculated as: DR = 100 – Purchase price of loan or security 100 X 360 (2) Number of days to maturityIII. YTM equivalent – this is a means of converting DR to YTM and it is calculated as: YTM (100 – Purchase price) 365 equivalent = Purchase price X Days to maturity yield (3)
  15. 15.  The Most Dangerous MM Instrument . Pakistan Investment Bonds (“PIB”) were launched in December 2000 to replace FIBs PIBs are issued in five tenors; 3Y, 5Y,7Y, 10Y, 15Y, 20Y and 30Y. The current coupons rates are 11.25%, 11.50%, 11.75%, 12.00%,12.50%,12.75% and 13% respectively.
  16. 16.  Term Finance Certificates are redeemable capital instruments and may be issued by a company directly to the general public, which also includes institutions. Unlike straight bonds, they are redeemable capital and are of long tenors i.e. more than one year. They are quoted on a price basis rather than yield to maturity. Earnings from TFCs are taxable @10% (Withholding tax as per the Income Tax Ordinance and zakat is deducted @2.50%.
  17. 17.  Repo Transaction. Call/Clean Transaction COI Transaction.
  18. 18.  Repurchase Agreements (“Repos”) are basically a means of raising funds by selling government approved securities at a fixed rate, with the intention of repurchasing them at a specified future date. For the party selling the security (borrower of funds) the transaction is referred to as a repo whereas for the party purchasing it (lender of funds), the transaction is referred to as a reverse repo. Repo Transaction ranges from O/N (i.e. One Day) to 1 Year.
  19. 19. Example: Bank A needs to borrow Rs 1 billion for 3days (i.e. from 7 jan-2011 to 10 Jan -2011).Bank A have a 3 months t-bill issued on 30-12-2010 and mature on 24-3-2011.The three day price quoted to Bank A for repo is13/13.25. Find the first price and second price ? Find the first Amount And Second Amount? First Amount is the amount Bank A receive today and Second Amount is the Amount Bank A pays at maturity.
  20. 20.  PKRV RATES Slab Bid 0-7 12.73 15-Aug 12.83 16-30 12.90 31-60 13.08 61-90 13.21 91-120 13.3 121-180 13.38 181-270 13.52 271-365 13.69 2 YEARS 13.98 3 YEARS 14.21 4 YEARS 14.22 5 YEARS 14.25 6 YEARS 14.27 7 YEARS 14.33 8 YEARS 14.1 9 YEARS 14.14 10 YEARS 14.31 15 YEARS 14.56 20 YEARS 14.76 30 YEARS 14.93
  21. 21. Now Calculate first price:DTM:76PKRV for 76 DTM=13.21% First Price = 100 (1+ 13.21 *76) 36500 = 97.3230 Second Price = FP*(1+ROR/365*No. of days) = 97.3230* (1+ 13.25 *3) 36500 Second Price = 97.4290
  22. 22. First Amount = face Value *FP/100 = 1,000,000,000 * 97.3230 100 = 973,230,000 Second Amount = Face Value * SP/100 =1,000,000,000*97.4290/100 = 974,290,000
  23. 23.  Call transactions consist of non-collateralized lending/borrowing of PKR funds. All Call/Clean transactions take place on the basis of line limits between banks and NBFIs. i.e. each institution has an internal limit placing/recieveing a cap on the line exposure. Bank Bank “CALL” Bank/ NBFIs “Clean” NBFI
  24. 24.  It is similar in nature to the Clean Transaction. Borrower issues a Certificate of Investment to the Lender. COI holds no value in the market and only the issuing bank can redeem it.
  26. 26.  The SLR is an indirect tool of monetary control used by the State Bank of Pakistan. 18% of Demand Time Liability for Commercial Banks and 15% for Development Financial Institutions. T-bills and PIB’s are maintained with the SBP.
  27. 27.  Another tool of monetary control with the central bank. Cash reserve is maintained with the SBP. 5% of the Demand Liability for Commercial Banks and 1% for Development Financial Institutions.
  28. 28. Active market players include: National Bank of Pakistan United Bank SCB Citibank NIB