Money Markets

Question 1

Who are the two primary participants in money markets?

Answer 1

1) Financial Institutions
2) Dealers

Question 2

What does distributed form mean?

Answer 2

Money markets are not centralised, instead electronic networks are used to buy and sell

Question 3

What are the two most popular forms of money market securities?

Answer 3

1) Commercial Paper
2) Repo Agreements

Question 4

Why are money market securities issued at a discount?

Answer 4

They are zero coupon

Question 5

2 central bank uses of Money Markets?

Answer 5

1) Open market operations
2) Act as a leader of last resort to support liquidity

Question 6

What are open market operations?

Answer 6

A central bank will buy or sell securities in the open market to set interest rates.

Buying will increase liquidity / decrease rates
Selling will decrease liquidity / increase rates

Question 7

How do banks participate in money markets?

Answer 7

1) Acts as dealers on commercial paper programmes
2) Bid on auctions
3) Take customer deposits and lend them out for profit

Deposit rate vs interest rate is profit rate

Question 8

What did BASEL enforce for commercial banks?

Answer 8

Enforced the amount of liquid assets needed

Question 9

How do companies use the money markets?

Answer 9

1) Short term flexible funding
2) Interest rate hedge

AIG showed the risk of private companies participating in the market in 2007

Question 10

Institutional Investors use of money markets?

Answer 10

Need cash / near cash deposits

Money markets are a secure profitable place to keep the deposits

Question 11

Intermediaries use of money markets?

Answer 11

1) Inter-dealer broker - e.g. bank takes large deposit in JPY, doesn’t want risk - offload to currency broker
2) Repo markets
- Fund for more liquidity
- lend excess cash

Question 12

3 examples of money market instruments?

Answer 12

1) Commercial paper
2) overnight funding
3) repo
4) Bills of exchange (IOU)

Question 13

How does a bill of exchange work?

Answer 13

1) Sell to customer
2) customer writes IOU
3) seller pays bank to make it “accepted”
4) wait x days for payment or sell in market for discount

Question 14

Points about commercial paper:

Answer 14

• Issued by FIGs and Corps
• Zero Coupon - issued at discount
• Rated by credit agencies
• ABCP exists

Question 15

What can fund ABCP?

Answer 15

1) Receivables
2) Loans
3) Credit Cards
4) Real assets

Question 16

What maturities are treasury bills usually issued in?

Answer 16

1,3,6,9 or 12 Months

Question 17

UK T Bill Auctions?

Answer 17

1) Weekly - called tenders
2) £500k min denom
3) 50k installments
4) 25k installments in 2ndry market
5) Comepetive bidding
6) bidding by approved firms
7) Held in CREST or euroclear.

Question 18

How to calculate a yield on a t bill?

Answer 18

Question 19

What is the formula to calculate the real rate of return?

inflation adjusted

Answer 19

1+r/1+inflation) -1