Money Market Final MMS

7/30/2019 Money Market Final MMS

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Money Market

Session 13


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http://www.slideshare.net/avnishbajpai/money-supply-in-india


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Money Markets

The money market encompasses a wide range ofinstruments with maturities ranging from one day

to a year, issued by the government and by banksand corporates that are traded in the markets.


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Money Markets

There are fundamental differences between Money and Capitalmarkets.

The same borrower may tap both markets to fulfill different

needs.

For instance, a corporate borrower may issue long term bondsin the capital market to raise funds to build a factory.

The same borrower may issue commercial paper in the moneymarket to finance his inventories.


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Why money markets ?

Take the case of a government.

It will collect revenues primarily by way of taxes.

Such revenues tend to arrive in lumps during certainmonths of the year.

However the government has to incur expenses throughoutthe year, both on account of developmental works as well ason account of wages and salaries.


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Why money markets ?

Consequently during most of the year the

government will be a borrower, and will issueT-bills to meet its short-term needs.


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Why money markets ?

The same it true for a business.

The balance in a current account will constantly fluctuate.

If surplus funds are available a business may temporarily parkits funds in money market securities.

Else if there is a deficit it will issue instruments likecommercial paper to raise short-term funds.


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Participants of Money Market

Government Agencies

Industrial Houses

Commercial Companies

Intermediaries e.g. Money Brokers,

Financial Institutions

Banks


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Features of Money Market

It is a wholesale market.

Not for small investors. However they can participate indirectly through

MMMFs.

The money market facilitates large scale transfer of funds.

For most banks except the Bank of America, fundrequirements usually exceed deposits.

For smaller state and local banks, deposits usually exceedfund requirements.


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Types of Instruments

The most transactions in the global money markets take theform of: T-bills

Call Money

Repurchase agreements

Certificate of deposit

Commercial paper Certificate of deposit

Eurocurrency deposits

Bankers Acceptance


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Call money market


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Call Money Market

It refers to either secured or unsecured callableloans made by banks to money market dealers. Thematurity period varies from 1-14 days. Call Money

Market is basically an overnight market in which allbanks participate.

A market that consists of the borrowing of money

by brokers and dealers for the purpose of meetingtheir credit needs.


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A fall in the call money rates indicates a rise in theliquidity in the financial system and vice versa.

The other key feature of this market is that theborrowings are unsecured; that is, they are notbacked by any collateral.

The daily turnover in the Call Money Market runsinto billions of rupees. The market is operational

between 9.30 am to 12.30 pm on Saturdays andbetween 9.30 am to 2.30 pm on every otherworking day.


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Purpose

Mainly to even out the short term mismatches ofassets and liabilities

Meet CRR requirements of banks (6%)

Discounting commercial bills


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Participants

Commercial banks

Private sector, public sector and cooperative banks

Lenders (only lend cannot borrow)

Financial institutions and mutual funds Intermediaries (borrow lend both)

DFHI, STCI and primary dealers (SBI Gilts, Punjab Gilts,

ICICI securities and Finance Corporation Ltd.)


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Call rates

They are the interest paid on call loans

High rates indicate tightness of liquidity position

Low rates indicate easy liquidity position in themarket

It reflects the market scarcities and lack of funds

Current call rate is 7% -8.5%


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Influencing Factors

Demand side Tax outflows Government borrowing programme Seasonal fluctuations in credit off take

Supply side Deposit mobilization of banks Capital flows Money lender Brokers


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Role of RBI

Does not lend or borrow funds

Intervenes when market overheated


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Treasury Bills


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Treasury Bills

When government need to borrow fund, govtissues short term security known as T-bills

They are free from the credit risk.

Investors: Depository institutions, FinancialInstitutions, Individuals, Corporations banks

Size of the issue:


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Types of T-Bills

14-day T-bills

91-day T-bills

182-day T-bills

364-day T-bills


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Pricing Treasury Bills

The price that an investor will pay for a T bill with aparticular maturity is dependent on the investorsrequired rate of return on that T bill.

T bills do not offer coupon payment but are sold ata discount from par value.

Price is determined on present value of the par

value.


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Example

If investor requires 7% annual return on one year T bill,willing price to pay:

P = 100 = Rs 93.45

1.07 To price a T bill with shorter maturity, return will reduce.

If investor requires 6% annual return on six month T bill,willing price to pay:

P = 100 = Rs 97.08

1.03


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Yield

Yield is influenced by the difference between theselling and purchase price. (primary & secondary)

Yields on T-bills are less

Yields on T-Bills are considered as benchmarkyields

Yield =(Price * No. of days to Maturity)

(100 Price ) * 365


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Illustration

Face value of a 364-day T-bill = Rs. 100

Purchase Price = Rs. 88.24

Yield =

= 13.36%

(100 88.24 )* 365

(88.24)* 364


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Suppose the investor plans to sell the T bill after120 days and forecast selling price as Rs 94

The expected yield will be:

Y = 9488.24 x 365

88.24 120

=???


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Estimating Treasury Bill Discount

T bill discount = ParPP x 360

Par n

100-88.24 x 360

100 364

= 11.63%


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Issuing Procedure

Auctions

Competitive and Non- competitive bids

Determination of Cut-off price


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Allotment of T-bills

Payment

T-bill Periodicity Notified

Amount (Rs.

Cr)

Day of

auction

Day of

Payment

91-day Weekly 1000 EveryWednesday

FollowingFriday

364-day Fortnightly 500 Every

Alternate

Wednesday

Following

Friday


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Certificates of Deposits

(CDs)


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Certificates of Deposits (CDs)

CDs are promissory note, negotiable and in marketable formbearing a specified face value and number.

Scheduled commercial banks and the major financial institutionscan issue CDs.

These are also known as Negotiable Certificates of Deposits

These are short term borrowing by banks

They are freely transferable after lock in period of 30 days


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Features of CDs

It is freely transferable by endorsement anddelivery. these are also usually issued at a discountto face value and are redeemable at par on maturity.

The RBI allows CDs to be issued up to one -yearmaturity. However the maturity most quoted in themarket is 90 days.

It does attract stamp duty.


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Issuers

Banks and financial institutions are the largestissuers of CDs, and are also subscribers to the CDsof one another.

Subscribers

CDs are available for subscription for individuals,corporations, companies, trust, funds, associationsetc.


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Benefits

CDs benefit both issuers and investors.

It is a better way of deploying short-term funds as

higher yield is offered secondary market liquidity isavailable and repayment of interest and principal isassured.


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Minimum Size and Maturity

Minimum Size and Maturity

CDs are issued for a period of 7 days to one year( normally oneto three years by the financial institutions) at a minimum amountof Rs. 1 lakh.

Discount

CDs are issued at a discount to face value.

Bank CDs are always discount bills.


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Commercial Paper


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Commercial Paper

Commercial paper is a short term, unsecuredpromissory note.

Issued by well known credit worthy firms. Issued to provide liquidity or finance a firms

investment in inventory and accounts receivables. Major issuer are finance cos, banks. Min maturity 15 days to 1 year. Company should have a min credit rating of P2

from crisil and A2 from ICRA. Individual investors can invest directly because

minimum denomination is less.


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Features

Commercial paper is unlike the commercial bill.

Commercial paper are Unsecured

CP market provides a cheaper source of funds & less paper

work formalities Higher liquidity.

Maturity Period.

Denomination & Size


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Participants

Issuers

Investors


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Yield

Yield are higher than the T bills because of creditrisk. Cps are sold at a discount from par value.

If investor purchase 30 days CP with a par value of

10,000 for a price of 9900 yield:= 10,000-9900 x 360

9900 30

=12.12%

CPs are issued for periods of30/45/60/90/120/270/360 days.


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Advantage of commercial paper:

High credit ratings fetch a lower cost of capital. Wide range of maturity provide more flexibility.

Tradability of Commercial Paper provides investorswith exit options.

Disadvantages of commercial paper:

Its usage is limited to only blue chip companies.

Issuances of Commercial Paper bring down the bank

credit limits.

A high degree of control is exercised on issue ofCommercial Paper.


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Factors Affecting the pricing

Inter Bank Call Rates.

Competing Money Market Investment Products.

Liquidity.

Credit Rating.


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Issuing Procedure

Eligibility criteria prescribed by RBI

Selection of Merchant Banker and IPA

Obtaining a resolution of company Board

CP credit rating

Approach principal banker


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Repo Market


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Repo Market

Repo With repurchase agreement (repo), one party sells

securities to another with an agreement to repurchase thesecurities at a specified date and price.

A Repo or a repurchase agreement is an arrangement thatfacilitates the borrowing of funds by a dealer.

Reverse Repo

It refers to the purchase of securities by one party fromanother with an agreement to sell them.

Thus both are same but different perspective.


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Participants: Financial institutions such as banks,savings and loan association, Non financialparticipants.

No secondry market for repo.


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Features

Maturity

Overnight

Open

Term

Collateralized lending

Haircut


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Haircut

The lender has to protect himself against the riskthat the market value of the collateral may decline.

Hence he will not lend the full value of thecollateral but will apply a discount.

This discount is called a haircut.


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The size of the haircut would depend on:

The maturity of the collateral.

Its liquidity.

Its price volatility.

The term to maturity of the repo,

Creditworthiness of the borrower.


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Advantages

Liquidity & Depth

Volumes

Source of Finance

Supply of Money


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Bankers Acceptance


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Bankers acceptance

A banker's acceptance, or BA, is a promisedfuture payment, or time draft, which is acceptedand guaranteed by a bankand drawn on a deposit at

the bank.

M M k P i M
http://en.wikipedia.org/wiki/Bankers%27_acceptancehttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Bankers%27_acceptance


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Money Market Price Movement

Internationaleco condition Fiscal policy

Monetarypolicy

CountryEco

condition

IssuersIndustry

condition

IssuersUnique

condition

Short term

Risk free

IR (Tbill rate)

Required rate onMM security

Price of the MM

security

Risk

Premium

of Issuer

/


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9/11 effect on Money Market????


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Repo Market in India

Tool by RBI

LAF

Auctions

Widen markets

Money Market Final MMS

Documents

Transcript of Money Market Final MMS