Lesson 2 Bank - The Money Market

Question 1

DEFINE THE MONEY MARKET

Answer 1

The money market is an electronic market where generally liquid assets issued by corporations, Government and financial intermediaris can be sold in the secondary market in a short time and at a reasonable prices.

Question 2

WHICH SECURETIES ARE SOLD IN THE MONEY MARKET?

Answer 2

LOW DEFAULT RISK: Normally they are BOND or securities similar to bonds, with a very low risk level
SHORT TERM
WHOLESALE: normally a single individual has no access to this kind of market alone but needs to has for help to intermediaries or financial institutions

Question 3

DIFFRENCES BETWEEN MONEY MARKET AND FINANCIAL INSTITUTIONS

Answer 3

FINANCIAL INSTITUTIONS:
They can better HANDLE the absece or the ASYMMETRIc INFORMATIONS (they are professional and are qualified).
They tent to have LONG TERM RELATIONSHIP with customers so there is more trust in terms of risk
ECONOMY OF SCALE - the bank repeat the same operation multiple times in a standardized way. Which make them generally less costly
MONEY MARKET:
no minimum of capital to start, less rules about type of security, time, regulation and no specified interest rate, so generally a higly risky firm, have advantages in being directly on the money market instead issuing securities trhough financial institutions.

Question 4

Who are the market players?

Answer 4

Public entities like GOVERNMENTS and CENTRAL BANKS where Governments generally use markets in order to cover national debt funds so they issue short term bonds to collect money and central banks use it to regulate the money supply by buying and selling financial instrumets (apply monetary economy). and on the other end there are PRIVATEs.

Question 5

Who are the partecipants in the private sector in the Money Market?

Answer 5

COMMERCIAL BANKS - as buyer and seller
INVESTMENT COMPANIES - servicer
FINANCE COMPANIES and INSURANCE COMPANIES as Buyers to increase money in the market and in case of insurances to pay their customers in case of need.
INDIVIDUAL as buyers
MUTUAL FUNDS (a service where financial experts invest the money of many people in many different companies) as buyers
BUSINESS as buyers and sellers

Question 6

What is the money market purpose?

Answer 6

Essentialy it allows individuals and investor so the ones who have money and the ones who are in need of money to exchange liquidity in the short time period.

Question 7

DESCRIBE SOME MONEY MARKET INSTRUMENTS AND THEIR FUNCTIONING

Answer 7

TREASURY BILLS (buoni del tesoro) - short term (3-6-9-12 months) - from government (so less risk, hight trust) - usually you need a financial intermediary to subscribe it. Bid competitive (pay less get the total amount 95/100)or non competitive (but the less you want to invest, less priority you will have in the subscritpion)
FEDERAL FUNDS - from bank to bank - usually overnight - to overcome liquidity problems - low risk
REPURCHASE AGREEMENT - buy and re-buy in 13 -14 days to cover a temporary need of lequidity - low interest rate, low risk
NEGIOTIABLE CERTIFICAT OF DEPOSITS - big investments in a bank, not refundable until the the of the contract, the capital is guaranteed, low interest rate, low risk
COMMERICAL PAPER - issued by firms, they are basically share and not bonds, short term but up to 270days, high risk because you hope the firm will stick to the contract. there is just a primary market and no secondary. 
BANKERS'S ACCEPTANCE - (Cambiale) usually issued between the bank and a firm that has no able to issue shares in the market. The bank is then generally used as in interemdiary between the firm and the secrities hareholders. 
EURODOLLAR DEPOSIT - deposit nominated in dollar, in foreign institute, the advantage is that they are regulated by the country where yis issued