1 - cash, money markets and FX Flashcards
real returns calc
(1 +r) = (1 +n) / (1+i)
UK T bills
Issued by DMO @ weekly auction (competitive tender)
typically life =91 days
min bid primary market = 500k @50k increments
min NV when trading = 25k
issued @ discount and redeemed at par
Annualized return for Tbill
trading at £94 over period of 3 months
6/94 x 12/3
US T bill
issued by treasury
1, 3 and 6 month life
commercial paper
- features
-issuance
Company version of T bill
- discount company sec
- generally unsecured short term debt
tho asset backed variants exist
direct paper - large issues who have market pres to issue directly to investors
dealer paper - sell to dealers who sell to market
commercial paper programme - multiple issues up to max amount over specific period
US and UK commercial paper life time
US - CP typically <270 days (debt over 9 months must be SEC registered)
UK - up to 5 years but only money market instrument if below 1 yr
Cert of deposit
certificate of fixed term deposit
tradable instrument
Pays interest lower than fixed term savings rat
Repos (repurchase agreements)
2 stage trade -sale and repurchase agreement between 2 parties
A sells gilt to B for 900, agrees to buy back in 1 month for 1000
A = borrowing cash
B = reverse repo - lending and generating interest
repo rate = difference between sale and repurchase price
baso - collateralized loan with interest built into repurchase price
mostly term but can be open - no fixed repurchase date
repo risks
default - mitigated through initial margin
market and collateral risk - mitigated through variation margin
-can clal more collateral if value drops
FX market basics
OTC, decentralized, 24 hrs
settlement on spot market = T+2
typically USD is base currency
FX quotes - 1st 3 figs are ‘big figure’ and last 2 figs are pipis/ticks
eg. 1.3020 cross rate = where USD doesnt appear in currency pair
safe haven and commodity currencies
safe heaven = swiss franc, USD, yen
commodity - AUD, CAD
liquidity and vol indicators in FX market
high liquidity can be indicated by
- high volumes
- narrow spreads - lower vol
vol can be affected by economic data
-inflation, payroll data, GDP, unemployment, interest rates
risk mitigation in FX markets
stop loss
rollovers
stop loss - closes out loss making positions
e.g. buy USD at price then emergency sell order if USD falls below set price
rollovers - avoids physical delivery
buy USD spot at beginning of day - sell end of day @ spot
settlement of both will be T+2 so they net off and you wont relieve delivery just profit/loss
what does spot rate GBP against USD
1.3010/15 mean
a bid/offer spread
low price = how much bani will pay for base currency
high price - how much bank offers for base currency
forward rate pip adjustment
EUR1 = USD1.2350/50
forward adjustment = 20/40
forward adjustment = adjustment to spot rate for fixing rate at a ruture date
adjustment = quoted in pips - either added /subtracted from spot rate
to decide whether +/- spread on forward rate always wider than spread on spot
add in this case - spread widened on addition
Where do forward rates come from
calculation of interest rate parity
forward adjustment based on difference between interest rates of 2 currencies and time til maturity
rates such that interest rate arbitrage is prevented
F/S = (1+variable rate) /(1+ base rate)
currency futures and options
currency futures = exchange traded forwards, used for hedging
currency options - typically OTC
day count conventions
UK = actual / 365
US and most others = actual / 360
cap and participation rates of structured deposits
cap rate = max return investor can recieved
participation rate = % of deposit exposed to index gains
CP and ABCP
Commercial Paper = unsecured short term promissary note issued by corps(+ local and sovereign issuers)
asset back commercial paper - short tewrm investment vehicle, mat 90-180 days issued by bank or fin. institution
