Lecture 2- Money markets and Eurocurrency markets Flashcards
What are Money Markets?
Markets in which short-term instruments (MMIs) are traded
What characterises an instrument as short-term?
When it has less than 1 year of original maturity
What are 3 main characteristics of Money Markets?
- They are very low risk
- Interest rates tend to be relatively homogeneous
- Generally interest is paid at maturity
How do you convert from a discount rate (d) to an interest yield (i)?
i = d/1-dn_sm
What is the residual maturity (n_sm)?
The time left until maturity. It’s expressed as a fraction of a year
What are Treasury Bills (TBs)?
Securities issued by the government with initial maturities of 3 months, 6 months or 1 year
What are Commercial Bills (CBs)?
The same as treasury bills but offered by large firms
What are Interbank Deposits?
Large deposits owned by banks made at other banks for short periods, often over night or a 7-day notice
What is a repurchase agreement (repo)?
The sale of some security (usually government bonds) with a promise to repurchase on a specified date at a specified price
Who are the 4 main issuers of MMIs?
- Banks
- Eurobanks
- Corporations
- Governments
Who are the 3 main holders of MMIs?
- Banks
- Corporations
- Households
How do banks hold MMIs?
They hold interbank deposits with other banks as highly liquid assets which they can withdraw quickly (often overnight) to rebuild reserves which may have run down as the result of unforeseen withdrawals or transfer of deposits by clients
How do corporations hold MMIs?
Firms of many kinds hold CDs for their characteristics as interest-bearing liquid assets. Multinational firms and other firms with large overseas trades hold euro-deposits
What are Certificates of deposit (CDs)?
A CD is a certificate, where a deposit has been made with a bank for a fixed period of time at the end of which it will be repaid with interest
Describe the corridor system of interest rate setting
The Bank of England doesn’t want LIBOR to be too volatile, so they attempt to keep it within a range. When LIBOR is approaching the limit of the range, the BoE offers liquidity to firms at a slightly lower rate forcing LIBOR down
