Financial Market
Money Market
Money Market
Fixed Income Market
Market wherein banks and other financial institutions lend, borrow and trade money.
In order to do so, they use  debt instruments , which pay interest.
The rate of income is often fixed, hence the term  fixed income market .
FIXED INCOME MARKET
Money market Bond market
 Cash market  Credit market ,  Debt market
Debt securities that Debt securities that
matures in less than one year matures in more than one year
Money Market
Features
Short-term time horizon
(governments, financial institutions and large corporations
manage their short-term cash needs)
Low interest rates
(money market securities are consider as an extraordinary safe investments)
Very high denominations
(limited access for an individual investor)
High liquidity
(small bid/ask spreads)
High quality
(low default risk)
Money Market
Money Market Account (MMA)
MMA is basically a high interest savings account.
Your money goes into short-term debt securities.
Your reward for allowing the financial institution to use your money is a premium interest rate.
MMA is insured by: Federal Deposit Insurance Corporation (FDIC) for up to $100 000.
Bank Guarantee Fund (Bankowy Fundusz Gwarancyjny) for up to Ź 100 000.
Money Market
Money Market Account (MMA) - Restrictions
Minimum deposit, as well as a minimum balance (sometimes $1000-$2500).
A limit to how many withdrawals you can make in a month's time (from 3 to 6).
You cannot withdraw an amount, or combined total of amounts, that causes your balance to go below the
minimum without penalties.
You can write up to three checks each month.
Money Market
Certificate of Deposit (CD)
A time deposit even more restricted than MMA.
A CD bears a maturity date (FIXED TERM deposit), a specified fixed interest rate and can be issued in any
denomination.
Maturity Date
Ranges from one month to five years.
Interest Rate
The longer the term of CD and the larger the initial deposit, the higher the interest rate.
CDs are negotiable.
Denomination
Small CDs => deposit less than $100 000.
Large CDs (Jumbo CDs) => deposit more than $100 000
CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $100 000.
Money Market
Certificate of Deposit - Restrictions
You won t have access to your money.
Withdrawals before maturity are usually subject to substantial penalty.
The penalties ensure that it is generally not in a holder s best interest to withdraw the money
You will, however, have an option of drawing out the interest as it s paid.
Interests could be mailed as a chequee or transffered into checking or savings account.
Naturally, this reduce total yield because there is no compounding.
Money Market
Certificate of Deposit
Name of depositor
Amount
Date of Maturity
Money Market
Certificate of Deposit Rates (CD Rates)
Money Market
Certificate of Deposit - Types
Negotiable CDs (NCDs)
A CD with minimum face value of $100 000.
It is mostly use by financial institutions to invest in lo-risk, low-interest security.
Inflation-Linked CDs
Provide investors with inflationary protection via annually variable interest rates that increase or decrease
with changes in the consumer price index (CPI) or any other measure of inflation.
Yankee CDs
CD issued in the U.S. market, typically in NY, by a branch of a foreign bank.
Most are negotiable instruments and have a minimum face value of $100 000.
Callable CDs
CD in which the bank may  call the CD, thus closing it.
Callable CDs pay higher interest rate.
By having this option banks manage their interest rate risk.
Money Market
Certificate of Deposit - Types
Bull CDs
A CD whose interest rate fluctuates in direct correlation to the value of an underlying market index.
The interest rate paid on the CD increases as the value of the market index increases.
Because there is minimum rate that has to be paid CD interest rate cannot go below 0% even if
market index falls rapidly in value.
Bear CDs
A CD whose interest rate fluctuates in inverse correlation to the value of an underlying market index.
The interest rate paid on the CD increases as the value of the market index decreases.
This type of CD is used for two main purposes: speculation or hedging.
Money Market
Certificate of Deposit - Types
Eurodollar Certificate of Deposit (Eurodollar)
Deposits denominated in U.S. dollars at banks outside the United States, and thus are not under the
jurisdiction of the Federal Reserve.
History of Eurodollars:
After WW II USA was the largest consumer market.
After the invasion of Hungary in 1956, the Soviet Union feared that its deposits in U.S. banks would be frozen.
Money Market
Certificate of Deposit - Types
Dollars do not have to be deposited in a European bank to be considered Eurodollars.
Popular locations of Eurodollar are Bahamas, the Cayman Islands, Caracas and mamy non-European countries.
Foreign branches of American banks can also accept Eurodollars.
Money Market
Certificate of Deposit - Types
Money Market
Certificate of Deposit - Types
Eurocurrency
 Euro" prefix can be used to indicate any currency held in a country where it is not the official currency.
Eurosterling
Euroswiss
Euroyen
Euroeuro
Money Market
Drafts
Types of draft:
Sight draft:
Require immediate payment by the second party
(demand draft, sight bill,
to the third upon presentation of the draft.
customer draft)
1. Drawer draws a draft
(instructs the drawee to pay the amount due a designated person (payee) upon demand)
2. Payee shows the draft
(demand the money from the drawee)
Payee
3. Drawee pays the money
Drawer
(bearer)
(maker , writer)
(from drawer account)
Drawee
(payer)
Money Market
Sight drafts - Cheques
Personal cheque
Amount
Payee
Date
(numerical) (longhand)
Drawer s signature
Money Market
Sight drafts - Cheques
Personal cheque
Order from a drawer (a person) that directs a bank to pay a define sum of money to a payee
form drawer bank s account.
Personal cheques can bounce, so they are more like promises.
Money Market
Sight drafts - Cheques
Certified cheque
A type of cheque where at the time the check is written bank guarantees payee that there is
enough cash available in the drawer s account. Funds are then set aside in the bank's internal
account until the check is cashed by the payee.
Money Market
Sight drafts - Cheques
Cashier s Cheque
A check written by a financial institution on its own funds.
It is signed by a representative of the financial institution.
A customer can buy a cashier s cheque for the full face value of the cheque.
A payee is guarantee to receive the money when cashing the cheques, because the amount of the
checque must first be deposited by the drawer into the issuing institution s own account.
Both certified cheque and cashier s cheque cannot bounce.
Money Market
Sight drafts - Cheques
Drawee s
Chasier s Cheque
signature
Remitter
Amount
(Chasier)
(who has paid) Payee
Date
Money Market
Sight drafts  Bank draft
I would like to
Since it is not possible for personal cheques to be issued in a currency other then that of the
send 100 $ to my
uncle for his
personal checking account, individuals buy a bank draft to deal with foreign commerce.
birthday.
Sending Bank Draft
deposit
deposit
Shows
Bank
Draft
deposit
Getting 100 $
Buying Bank Draft with
Face Value = 100 $
(Payment in EUR)
Cheque draw by one bank against funds deposited into its account at another bank, authorizing the second bank
to make payment to the individual named in the draft.
Money Market
Sight drafts  Bank draft
Drawer s \ chasier s
signature
Date Payee
Amount
Drawee
Money Market
Sight drafts  Bank draft
Money Market
Time drafts
Types of draft:
Time draft: A draft which is payable at a specified point in the future
(Time Bills , Time Loans) or under certain circumstances.
1. Drawer draws a draft
(instructs the drawee to pay the amount due a designated person (payee)
at a specific date or under certain circumstances)
2. Payee shows the draft
(demand the money from the drawee)
Payee
Drawer
3. Drawee pays the money if conditions are meet
(from drawer account)
Drawee
Money Market
Time drafts
DATE
PAYEE
AMOUNT
CONDITIONS
SIGNATURE
AMOUNT
Money Market
Time drafts  Bill of Exchange
I want to sell
goods and I
Bill of exchange
trust those
Drawer Payee
guys.
Bill of Exchange
Writing 3 bills of exchange upon buyer
Sending Bills
I need goods
but I don t
Seller
have money
now
Accepting the Bill Purchase order
Buyer
Drawee / Acceptor
Market
Money Market
Time drafts  Bill of Exchange
Bill of exchange
A type of draft (sight or time) that guarantees payment for goods mostly
in international trade.
They are usually made in sets of three, which are alike in all.
The bills are sent by a different mails and whichever arrivers first is used.
Bills of exchange were initially developed by merchants who wished to resell goods before making
payment on them.
Very similar method of setting accounts was used by an Arab merchants as early as the 8th century AD.
The present form of the bill of exchange comes form 13th century.
Lombards of northern Italy used this in foreign commerce.
Money Market
Time drafts  Bill of Exchange
Drawee Payee Drawer
Amount Drawee
Money Market
Time drafts  Bankers Acceptance
A time draft.
Could be defined as a certified bill of exchange.
Bill of exchange vs Bankers acceptance
Similarities
Guarantees payment for goods mostly in international trade.
Differences
Drawee (a bank) certifies (accepts) the bill of exchange (drawer gets a credit line).
When dealing with international trade BAs require letter of credit (L/C).
Money Market
Time drafts  Bankers Acceptance
I don t trust
Time draft
the buyer so I
I need goods
accepted.
but I don t
won t sell on
have money BA created.
credit
now
1. Purchase order
5. Shipment of goods
10. PV(BA s face value) 11. PV(BA s face value)
14. BA face value
4. L/C
Exporter s
Importer s bank
bank
2. L/C application
Exporter
Importer
Second 3. L/C
8. BA
market
7. Shipping documents
6. Shipping documents + time draft
9. PV(BA s face value)
+ time draft
LEGEND:
- Before BA creation
12. BA presented
- At and just after BA creation
13. BA face value
- At maturity date of BA
Money Market
Time drafts  Letter of Credit
Letter of Credit (L/C, LC, LOC)
(Documentary credit, Documentary letter of credit, DC, D/C or simply: credit)
A document that a buyer can request from his bank in order to guarantee that payment for
goods will be transferred to the seller.
In pratice:
Buyer s bank assure a seller that the buyer has a credit line.
In case that the buyer won t be able to make payment on the purchase, the bank will.
The supplier won t be paid until banks receives a confirmation that
the goods have been shipped.
Money Market
Time drafts  Letter of Credit
Buyer
Buyer s credit limit
Bank issuing
L/C number
L/C maturity
http://chestofbooks.com/finance/banking/Banking-Credits-
And-Finance/images/A-Letter-of-Credit-First-Page.png
Money Market
Time drafts  Bankers Acceptance
Negotiable time draft financing international trade.
The draft is guaranteed by the accepting bank.
By accepting the draft, the bank agrees to pay the face value of the draft
if the drawer fails to pay.
By lending its name to a transaction, the accepting bank makes it easier for an importer or
exporter to obtain trade financing.
The accepting bank assume some risk, although in most cases the credit risk is minimal as
banks generally deal only with tolerated companies.
Money Market
Time drafts  Bankers Acceptance
Acceptance Maturity Amount L/C reference Payee Sight date
Drawee
Money Market
Time drafts  Bankers Acceptance
Issued in a bearer form.
Flexible maturity dates to a maturity of 1 year.
Typically issued from 30 to 90 days.
Issued at discount face value.
Minimum issue size of $500 000.
Issued in multiples of $1 000.
A stamping fee is charged on each draw date as a compensation to a bank for accepting the BA.
Credit line required.
Money Market
Time drafts  Bankers Acceptance
The rates at which BAs are traded calls Bankers acceptances rates (BA rates).
FED publishes BA rates in its H.15 bulletin (also Wall Street Journal under  Money rates section).
Money Market
Treasury Bills
A short-term debt obligations of the National Treasury with a maturity of less then one year.
They are sold with denominations of $1,000, $5,000, $10,000, $25,000, $50,000, $100,000 and $1 million.
T-bills usually have maturity of one month (4 weeks), three months (13 weeks) or six months (26 weeks)
T-bills are propably the most popular money market instruments:
they are simple, almost risk-free, free of taxes
Money Market
T-Bills Yield
The profit from Treasury Bills is equal to a discount value
(today we are paying less than we will receive at maturity)
discount =� FV -� PV
Example 1 Face value = 100 Price = 90 Time to maturity = 1 year (360 days)
discount =� 10
so& .. discount rate equals: rate of return equals:
d r
PV FV PV FV
FV -� PV 10 FV -� PV 10
d =� =� =�10.00% r =� =� =�11.11%
FV 100 PV 90
Money Market
T-Bills Yield
Example 2 Face value = 100, Price = 94, Time to maturity = 180 days
6
6
so& .. d =� =� 6.00%
r =� =� 6.38%
100
94
If we want to compare T-bills between each other, we need to present rates in the same time horizon.
FV -� PV 360 FV -� PV 360
ć� �� ć� ��
d =� �� r =� ��
�� �� �� ��
FV t PV t
Ł� ł� Ł� ł�
t = number of days to maturity
discount rate (d) yield (r)
Example 1
10.00% 11.11%
Example 2
12.00% 12.76%
Money Market
T-Bills Yield
Why do we multiply rates by ( 360/numbers of days to maturity ) ??
Let s start with simple compounding: Finding nominal rate is simple:
FV
-�1
PV
FV =� PV (1+� rT) r =�
T
FV FV -� PV
-�1 =�
as we know and T = ( t / 360)
PV PV
if we use that knowledge we will get:
FV -� PV
PV FV -� PV 360
r =�
r =� ��
t
PV t
360
Money Market
T-Bills Yield
Knowing discount rate or yield, we can easily find the price of a T-Bill:
FV -� PV 360
FV -� PV 360
d =� ��
r =� ��
FV t
PV t
t
t
d �� �� FV =� FV -� PV r �� �� PV =� FV -� PV
360
360
FV
PV =� FV (1-� dT )
PV =�
1+� rT
T = ( t / 360)
Money Market
T-Bills Auctions
T-bills are issue through a bidding process (occurs weekly) at a discount from par value.
Bills with 13-week and 26-week maturities are auctioned each Monday.
Bills with 4-week maturity are auctioned each Tuesday.
Bills with 52-week maturity are auctioned Mondays, but only once a month (every 4 weeks).
You can bid T-Bills at a bank, through a dealer or broker.
Nowadays you can bid T-Bills online.
T-bill are now issued only in electronic form, though they used to be paper bills.
Money Market
T-Bills Auctions
In an auction, two types of bids can be submitted: non-competitive and competitive
Non-competitive bid
(mostly small investors and individuals)
You agree to purchase specified quantity with a discount rate set at auction.
You are guaranteed to receive the bill you want and in the full amount (but up to $1 milion).
YOU DO KNOW A QUANTITY, BUT YOU DON T KNOW A DISCOUNT RATE.
Competitive bid
(generally primary dealers)
You specify a discount rate you are willing to accept.
You agree to to purchase indicated quantity at specified discount rate or at any higher rate.
You can buy up to 35% of the initial offering amount for compatitive bidders.
Your offer can be rejected.
YOU DO KNOW THE DISCOUNT RATE, BUT YOU DON T KNOW A QUANTITY.
Money Market
T-Bills Auctions
1 1,5 3,5 1 1 2
" 0.035 + " 0,0305 + " 0,03508 + " 0,0351 + " 0,035125 + " 0,03515
10 10 10 10 10 10
Non-competitive bidders Competitive bidders
U.S. Treasury Department
3.5088%
3 bidders: Offering $12 million in 4 week T-bills
8 bidders:
1) $3 million
1) $1,0 million at 3,5000%
2) $0,5 million
2) $1,5 million at 3,5050%
$10mln x 35% = $3,5mln
3) $0,5 million
$0 mln
$7,5mln
$10mln
$9 mln
$4mln
mln
T-bills left: $2 3) $4,5 million at 3,5080%
$3 mln
(max 3,5 mln per bidder)
4) $1,0 million at 3,5100%
5) $1,0 million at 3,5125%
$2 million in T-bills
Weighted Average
STOP
6) $7,0 million at 3,5150%
(max 1 mln per bidder)
$10mln x 35% = $3,5mln
Will get what is left: $2mln
7) $3,0 million at 3,5200%
highest accepted discount rate
8) $4,0 million at 3,5250%
minimum successful price (if prices are given)
set discount rate
cut off yield (coupons securities)
Money Market
T-Bills Auctions
Non-competitive bidders
Competitive bidders
All non-competitive bidders receive
All competitive bidders receive
a weighted average from a successfull
a highest accepted discount rate.
competitive bids.
Competitive will get:
Non-competitive will get full amount.
1) full amount if the specified rate is less than the
discount rate set by the auction.
Calculating T-bill price from a discount rate:
T-bill is quoted with 3,5088% discount rate.
2) less than the full amount if the bid is equal to the
Face value equals 10 000$ and there is 4 weeks to maturity.
set discount rate.
Price = PV = FV * (1 - d*T)
3) rejected if the rate you specify is higher than the
Price = 10 000 * (1  0.035088 * (4*7 / 360)) = 9 972.71$
discount rate set at the auction.
Money Market
T-Bills Auctions
Auction No. 753, Held on 20-Aug-2008
35 days 91 days 182 days 364 days
Due Date
25-Sep-08 20-Nov-08 19-Feb-09 20-Aug-09
No. Of Bids 23 27 37 53
Successful Bids 10 27 34 26
Highest Bid / 100 99.52 98.05 95.6 90.26
Lowest Bid / 100 99.05 97.27 94.25 88.5
Minimum Successful Price / 100 99.41 97.27 94.47 89.35
Weighed Average Price (WAP) for successful bids 99.46 97.82 95 89.71
Weighed Average Yield (WAY) per annum 5.66% 8.96% 10.55% 11.50%
Amount Offered 7,000,000,000 45,500,000,000 30,000,000,000 45,000,000,000
Total Tendered 10,938,000,000 27,239,570,000 18,864,960,000 60,663,050,000
Undersubscribed (+)
-3,938,000,000 18,260,430,000 11,135,040,000 -15,663,050,000
Oversubscribed (-)
Successful Bids 7,000,000,000 27,239,570,000 17,814,960,000 25,006,220,000
Source: Bank of Tanzania Currency: Tanzanian Shilling
Money Market
T-Bills Auctions
Auction Date Supply (mln PLN) Demand (mln PLN) Sale (mln PLN)
06.04.09 1,000.00 2,832.50 1,077.40
09.04.09 1,500.00 5,065.17 1,961.37
20.04.09 1,500.00 3,239.57 1,492.38
27.04.09 1,500.00 2,365.08 1,215.08
Auction held on 19 October 2009
04.05.09 1,700.00 3,231.06 1,328.06
11.05.09 800.00 1,563.01 758.51
52 weeks
18.05.09 800.00 1,359.40 633.10
25.05.09 2,500.00 8,378.21 2,515.26
Due Date
18 October 2010
01.06.09 2,000.00 9,419.31 2,125.00
Minimum Price 9585.38
08.06.09 1,600.00 5,932.95 1,600.00
15.06.09 1,600.00 3,177.76 1,615.86
Maximum Price 9590.81
22.06.09 1,000.00 4,690.65 1,083.00
29.06.09 1,200.00 4,663.86 1,200.00
Weighed Average Price (WAP) 9587.01
06.07.09 1,200.00 3,254.65 1,255.95
Weighed Average Yield (WAY) 4.260%
13.07.09 1,300.00 3,065.87 1,317.37
27.07.09 1,500.00 2,311.49 1,454.79
Amount Offered (mln PLN) 600,000,000
03.08.09 1,500.00 3,153.56 1,512.00
Total Tendered (mln PLN) 1,824,550,000
10.08.09 1,300.00 4,218.53 1,420.00
17.08.09 1,000.00 2,213.64 835.20
Successful Bids (mln PLN) 400,400,000
24.08.09 1,000.00 3,365.05 860.00
31.08.09 1,000.00 2,173.60 812.10
Source: Ministry of Finance (Poland)
07.09.09 1,000.00 1,540.50 806.50
14.09.09 1,000.00 1,495.18 803.18
21.09.09 1,000.00 3,658.33 1,000.00
28.09.09 1,000.00 2,485.21 848.06
12.10.09 600.00 1,962.10 408.65
19.10.09 600.00 1,824.55 400.40
Money Market
Trading T-Bills
BUY SELL
Number of days to
Maturity date
Price for 100 PLN Price for 100 PLN
maturity
Discount rate Discount rate
nominal value nominal value
2007-04-12 9 4.096 99.898 3.098 99.923
2007-04-19 16 4.093 99.818 3.295 99.854
2007-04-26 23 4.089 99.739 3.492 99.777
2007-05-03 30 4.086 99.659 3.589 99.701
2007-05-17 44 4.080 99.501 3.584 99.562
2007-05-31 58 4.073 99.344 3.579 99.423
2007-06-14 72 4.067 99.187 3.673 99.265
2007-06-28 86 4.060 99.030 3.668 99.124
2007-07-26 114 4.145 98.687 3.755 98.811
2007-08-16 135 4.135 98.449 3.747 98.595
2007-09-06 156 4.125 98.213 3.835 98.338
2007-09-27 177 4.115 97.977 3.827 98.119
2007-10-18 198 4.105 97.742 3.818 97.900
2007-11-15 226 4.092 97.431 3.807 97.610
2007-12-13 254 4.079 97.122 3.890 97.255
2007-12-27 268 4.073 96.968 3.884 97.108
2008-01-10 282 4.160 96.741 3.972 96.888
2008-02-07 310 4.146 96.429 3.960 96.590
2008-03-06 338 4.225 96.033 4.041 96.206
2008-03-27 359 4.215 95.797 4.123 95.888
Source: BRE Bank (Poland) Currency: Polish Złoty
Money Market
T-Bills Rates - USA
Money Market
T-Bills Rates  Poland
Money Market
T-Bills Rates
Money Market
Commercial Paper (CP)
Debt instrument that matures before nine months (270 days) and can be issued by any corporation.
The Money
The Company
The People
e.g. Salaries
Income
The money is only used to fund operating expenses or current assets
(inventories, receivables& ) and it is not used for financing fixed assets,
such as land, buildings or machinery.
LEGEND:
- Before CP maturity
- At CP s maturity
Employees
Money Market
Commercial Paper
Directly Sell CP
to a dealer
Company
Individuals
Reselling CP
Dealer
Mutual Funds
&
Money Market
Commercial Paper
Direct issuers
Financial companies that have frequent and sizable borrowing needs
and find it more economical to sell paper without the use of an intermediary.
The dealers
Large securities firms and subsidiaries of bank holding companies.
Most of these firms also are dealers in US Treasury securities.
Dealers Fee
In the US dealer s fee is approximately 5 basis points annualized.
It translates to $50,000 on every $100 million outstanding.
Dealer fees tend to be lower outside the United States
Money Market
Commercial Paper - Advantages
Commercial paper is a lower cost alternative to a line of credit with a bank.
Once a business becomes large enough, and maintains a high enough credit rating, then using commercial
paper is always cheaper than using a bank line of credit.
Money Market
Commercial Paper - Disadvantages
CP is not backed by collateral.
CP are backed by the borrowing company's high credit ratings
and regular cash flow.
Only firms with excellent credit ratings from a recognized rating agency
will be able to sell their commercial paper at a reasonable price.
The higher the rating, the lower the CP yield should be.
The lower the rating, the higher the CP yield should be.
Money Market
Commercial Paper  Rating System
Long-Term: A -
Short-Term: F2
Long-Term: A
Short-Term: F1
Gdańsk Częstochowa
Long-Term: BB +
Long-Term: BBB + Long-Term: BBB
Long-Term: BBB +
Long-Term: A -
Short-Term: F2
Short-Term: F2
Wrocław
Long-Term: BB
Long-Term: BBB +
Long-Term: A -
Money Market
Asset Backed Commercial Paper (ABCP)
ABCP is a form of commercial paper that is collateralised by financial assets such as consumer loans.
Company
Bank
Selling assets
Special Purpose Vehicle (SPV)
to SPV
Structured Investment Vehicle (SIV)
A corporate body
(usually a limited company of
Assets
some type or a limited partnership)
Mix of many different assets
which are jointly judged to have a low
Issuing ABCP
risk of bankruptcy by a ratings agency.
Money Market
Commercial Paper Outstanding
09 October 2009:
No. of companies in the United States that issue commercial paper: 1,700
Total commercial paper outstanding:
$1.299 trillion
Assed backed commercial paper outstanding: $532 billion
 Non Assed Backed commercial paper outstanding: $767 billion
Issued by non-financial corporations: $134 billion
Issued by financial corporations:
$633 billion
Money-market mutual funds and other funds open primarily to institutional investors
buy about 60% of the commercial paper in the market.
Money Market
Asset Backed Commercial Paper Outstanding
Money Market
Commercial Paper Outstanding in Poland
Commercial paper market was lunched in 1994.
The first issue was organized by Próchnik S.A. (Polski Bank Rozwoju acted as a dealer.)
End of: 2004 2005 2006 2007 2008
CP outstanding (mln zł): 9 935,31 8 604,30 12 885 13 757,83 12 952,29
CP dealers: 13 (year 2006)
CP issuers: 193
(year 2004)
CP yield (AA Company): 6,3%
(year 2004)
Money Market
Repurchase Agreements (REPO)
A REPO is economically similar to a secured loan.
Interests Money
AFTERTODAY
SOME TIME
Borrower Lender
Seller Buyer
Cash Receiver Cash Provider
Securities
Money Market
Repurchase Agreements (REPO)
Terminology
REPO (Dealer) REVERSE REPO (FED)
Lender
Borrower
You are: Cash receiver Cash provider
Seller
Buyer
Near leg: Sells securities Buys securities
Far leg: Buys securities Sells securities
So REPO and REVERSE REPO are exactly the same kind of transaction,
just described from opposite points of view.
Types of REPO (base on maturity)
REPO MATURITY
OVERNIGHT one-day maturity transaction
TERM repo with a specified end date
has no end date
OPEN
(repos are typically short-term, it is not unusual to see repos with a maturity as long as two years)
Money Market
Reversed Repurchase Agreements
Money Market
Federal Funds (Fed Funds)
FED requires to keep a certain percentage of banks money on reserve.
(USA: if dollar amount of net transaction accounts exceeds $58.8 million, the reserve equalls 10%).
Reserve requirements can act as inflation-fighting tool.
Banks earn no interest on reserves.
Banks try to stay as close to the reserve limit as possible without going under it,
lending money overnight back and forth to maintain the proper level.
Federal Reserve
Bank Account
Reserves
Withdrawals
!!!
Reserves limit
(% of customers money)
Other Federal Reserve Bank Accounts
Fed Funds
Money Market
Federal Funds (Fed Funds)
Historical changes in cash reserve ratios
Country 1968 1978 1988 1998
Turkey 58.3% 62.7% 30.8% 18.0%
United Kingdom 20.5% 15.9% 5.0% 3.1%
Germany 19.0% 19.3% 17.2% 11.9%
United States 12.3% 10.1% 8.5% 10.3%
Current cash reserve ratios:
Australia None Costa Rica 15%
Canada None Hong Kong 18%
New Zealand None Brazil 20%
Sweden None China 21.5%
Eurozone 2% Tajikistan 20%
Poland 3% Suriname 25%
Turkey 8% Lebanon 30%
Money Market
Federal Funds Rates
The interest rate at which a depository institution lends
immediately available funds to another depository institution overnight.
The Federal Open Market Committee (FOMC) sets a target level for the fed funds rate,
which is its primary tool for implementing monetary policy.
Money Market
Summary
Money market is based on a short-term loans.
Those short-term loans differs form each other due to:
Maturity
Denominations
Participants (borrowers, lenders)
After this section you should be familiar with:
Short term deposits: MMAs, CDs (and all of its types).
Drafts: Sight drafts (cheques), Time drafts (Bills of Exchange, BAs (L/C)).
T-Bills, Commercial Papers (plus credit rating system), ABCPs, REPOs, Federal Funds.
Money Market
Literature
David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard L. Peterson,
 Financial Institutions, Markets, and Money , 10th edition, John Wiley & Sons Inc., 2008.
Chapter 7, Page 167-199.