Chapter 7 Money Market

Question 1

Money market

Answer 1

• The market in which interest related financial transactions with a short term (<1 yr) take place
• Mostly OTC
• Between banks

Question 2

Function of the money market

Answer 2

Liquidity position: Enable parties with temporary liquidity surpluses (Lenders) to give a short-term loan to parties with a shortage of money (borrowers)

Question 3

Money market rates

Answer 3

• Quoted on yearly basis

- 2.10-2.12 means bank is willing to borrow money at 2.10 and lend at 2.12

Question 4

Basis points

Answer 4

Indication of lending price in 0.01%

Question 5

o/n deposit

Answer 5

deposit from today to tomorrow

Question 6

t/n deposit

Answer 6

deposit from tomorrow to spot

Question 7

spot/next

Answer 7

deposit from spot to one day after spot

Question 8

turn of month

Answer 8

deposit from the last trading day of the month to the first trading day of the month

Question 9

Day count convention Actual/360

Answer 9

Money market: EUR, USD, CHF, SEK, NOK, JPY, CAD

Question 10

Day count convention Actual/365

Answer 10

Money market: GBP, NZD, AUD, ZAR, SGD

Question 11

Day count convention Actual/actual

Answer 11

UK bonds in general, gov. bonds and eurobonds

Question 12

Day count convention 30/360

Answer 12

US Eurobonds

Question 13

Day count

Answer 13

First date till last date, first date does count, second date does not

Question 14

Broken period

Answer 14

Money market instrument with a term that differs from a whole month

Question 15

Discount factor

Answer 15

The factor by which a future value must be corrected in order to calculate the present value

Question 16

Deposit

Answer 16

1. Loan for a fixed term at a fixed interest rate
2. OTC-product
3. Non-tradable
4. Penalty for early withdrawal

Question 17

Repo

Answer 17

Repurchase agreement: short term loan in which securities (usually bonds) are provided as collateral.

Question 18

Price repo convention

Answer 18

Bid-ask: 1.77-1.75 (UK convention). The repo seller can borrow money from the repo buyer at a rate of 1.77

Question 19

Repo seller

Answer 19

• The borrower of the money - I repo

Question 20

Repo buyer

Answer 20

• The lender of the money

- I reverse in bonds (=reverse repo)

Question 21

General collateral

Answer 21

1. Accepted bonds are listed in master agreement (GMRA)
2. Substitution is allowed
3. Daily margining
4. General collateral team

Question 22

Daily margining (margin call)

Answer 22

Each day the buyer compares the actual value of the collateral with the value of his claim (incl. required margin). If the value is too low, he ask the seller to transfer extra bonds

Question 23

Special trading

Answer 23

1. If the buyer sets specific requirements for a specific bond.
2. Bond is needed for arbitrage or short selling
3. Substitution not allowed
4. Concluded by securities lending department

Question 24

Delivery repos

Answer 24

Collateral that is transferred directly from the account of seller to the buyer

Question 25

HIC (douple dipping)

Answer 25

Hold in custody: not directly transferred Usually refinancing transactions of the ECB

Question 26

Tri-party repo

Answer 26

1. Custodian involved as agent.
2. Nets the contracts
3. Takes over administration, management and daily margining
4. Defines the collateral pool

Question 27

Interest type for Interbank deposits 2 weeks- 1 year

Answer 27

EURIBOR and LIBOR

Question 28

Interest type for Overnight investments

Answer 28

EONIA, SONIA (sterling), SARON (swiss), TONAR (Japan)