Công cụ tài chính MODULE 2 money market

MODULE Money market LOGO Contents LOGO Money market Pricing Money market instruments Pricing instruments in supply & demand The users of money market LOGO Basic concepts and definitions v The term money market is a bit confusing , because money or currencies are not actually traded in Money Markets v Securities (eg treasury bills, government bonds) that are traded, are short –term and highly liquid , that is, they are close to being like money and can easily being converted into money LOGO Basic Concepts v The Money Markets can therefore be characterised as having securities that trade in one year or less , are of large denomination and are very liquid v Note that Money market transaction are not taking place in any one particular locations/ building- they are normally done electronically from various locations LOGO The Purpose of Money Markets v Investors in Money Market: Provides a place for warehousing surplus funds for short periods of time v Borrowers from money market provide low-cost source of temporary funds v Corporations and government use these markets because the timing of cash inflows and outflows are not well synchronized Money markets provide a way to solve these cash-timing problems LOGO Key Participants in the Money markets v Governments/Central Banks- For example US Treasury, Bank of England- Sell Treasury/ Government bills to fund national debts- Also buy /sell to control money supply v Large Businesses- Buy and sell securities( TBills) to manage finance/cash v Commercial Banks-Buy/sell (T-Bills) for their operations and for clients LOGO Who Participates in the Money Markets? LOGO The Key function of Money Markets v The key function of the money markets is the provision of a framework for the conduct of monetary policy by the central banks v Monetary policy normally consists of setting interest rate by the central bank in order to control inflation rate via reduction in demand; also setting interest rate in order to stimulate demand and employment LOGO Characteristics of MM Instruments v Initial maturity of less than one year v Initial maturity versus residual (remaining) maturity v Many MM instruments have an initial maturity of much less than year (three months is quite common) v Average residual maturity is very short LOGO Characteristics of MM Instruments v Low risk §  Low default risk since issuers are governments, banks and large corporations §  Low interest rate risk since interest rate changes cannot have much effects on short-term assets v High liquidity (the speed with which an asset can be converted to money for a known value) §  Short-term §  Low interest rate risk or small price changes v MM instruments tend to have similar rates of return which are lower than the rates that can be earned in other financial markets LOGO Money Market and conduct of macroeconomic Policy v Money Markets are used by government for borrowing large sums of money via issues of bonds (government Gilts) v More recently money markets have been actively used for the conduct of monetary policy to stimulate the economy via so called Quantitative Easing QE This and the policy interest rate have been the key instruments of the monetary policy in the UK/US v Since 2009 Bank of England has created £325 billion via QE LOGO How Does QE work in practice v QE is used to stimulate an economy near recession, that when there is successive fall in output (GDP), unemployment , rising inflation, and low level of banking sector lending v This was the situation in the UK during 2009 (still is the current problem) To stimulate the economy Bank of England Created (Electronically!) £ 200 billion in 2009 , via ,so called, QE operations LOGO Operation of QE in the UK v The Bank of England uses the Money Market to buy back UK government assets ,mainly low risk government bonds /gilts from the commercial banks , insurance companies pension funds and other companies The bank of England calls this the asset purchase scheme v Note the purchase back mainly has involved the most risk free asset available –The GILTS LOGO Effects of QE in the UK (1) v In theory the QE operation has several effects: The sellers of assets now have cash to spare Some may spend it on new business and venture capital; others may deposit it in a high street bank , which , in theory ,ought to lead to more lending to other customers ,such as small businesses However, it is also possible that the banks might just hoard some of the cash to improve balance sheet LOGO Effects of QE in the UK(2) It keeps down bond/gilts yields, which in turn helps to keep down the long term interest rates throughout economy The theory is that the higher the price of bond is (via a rise in demand) The lower would be the bond yield and the interest rates The lower interest rates making it easier for companies to borrow in the money /banking markets This helps bigger companies through credit crunch and boosts the stock market LOGO Effects of QE in the UK (3) However, QE also depresses rates for savers and people buying annuities or pensions Savers are clear losers from QE operation and in particular the pensioners ‘ income would be badly hit v The annuity rates ( rates of return on savings made for retirement) have fallen by 25% as a result of QE operation in the Uk Over a million pensioners will be permanently poorer for the rest of their live, as they have bought an annuity LOGO Effects of QE in the Uk (4) at the rates that have been artificially depressed by the bank of England A side effect of QE has been to keep the pound exchange rate down ,because of low rates of interest This in turn appear to have helped exporters v In view of falling inflation, the bank of England, embarked on further £125 billion QE operation since 2009 ( £50 billion February 2012), to help stimulate the economy LOGO Problems with the QE v Central Bank creating money out of thin air with very little additional assets to support This could potentially lead to high inflationary pressures v Future Borrowing by the bank/government via issues of bonds might be difficult in the future There may have been many sellers of gilts but there may not be many willing buyers when the bank wants to sell its holdings v Significant adverse effect on savers and pensioners LOGO Eurodollar Market v Most international contracts are in Us dollar Risk of default by the US banks keeping Soviet union Dollars in 1950s led to UK banks offering to hold dollar denominated deposits – this led to formation a parallel money market in Europethe Eurodollar Market- This market normally gives slightly higher rates of yield v Some Large London banks act as brokers in the international Eurodollar markets.( London inter bank market) Used by the US banks to make up temporary shortfalls in their reserve with the fed LOGO London Eurodollar Market v Banks from around the world buy and sell overnight funds(in US dollars) in this market v The rate paid by banks buying funds is the LONDON INTERBANK BID RATE (LIBID) v Funds are offered for sale in this market at the (LIBOR) v A Highly competitive market , many banks participating LIBOR and FED fund rates are very close to each other LOGO Pricing of Key Instruments v There is virtually no risk in T-Bills, many buyers and sellers TB is a discount instrument- The difference between maturity price and the purchase price v  The YIELD on an Investment can be found as follows: v Calculation of the annual yield for the T-Bills i= (F-P)/p *(365/n) i= annualised yield on the investment F= face value (amount paid at the maturity P= purchase price n= number of days left until maturity LOGO Calculation of annual yield v Example-An investor decides to purchase a 91 – day T-Bill for $9850,when it matures ,the bill will be worth $10000.What is the bill’s annualised yield? i= (10000-9850)/9850 * (365/91) =6.11% per annum LOGO Examples v Now suppose that investor decides to sell T-Bill 31 days before it matures ,he/she will receive $9948 What is the annualised yield in this case v i=( 9948-9850)/9850 * (365/60) v  = 6.05% LOGO Workshop v Describe the key characteristics of money markets “instruments” Explain how these characteristics affect their rate of return relative to other financial assets v  Identify the main participants in money markets and explain how central banks conduct money market operations in their conduct of monetary policy Give examples to explain your answers LOGO Workshop v Explain how sate - bank of Vietnam might use the policy rate to combat potential inflationary pressures in the Vietnam economy ...Contents LOGO Money market Pricing Money market instruments Pricing instruments in supply & demand The users of money market LOGO Basic concepts and definitions v The term money market is a bit... operations and for clients LOGO Who Participates in the Money Markets? LOGO The Key function of Money Markets v The key function of the money markets is the provision of a framework for the conduct... date at a set price Today Money Sell securities Lender Borrower Repurchase the securities One week later Money Contents LOGO Money market instruments Pricing Money market instruments Pricing