Futures are traded on exchanges. These exchanges may be electronic, floor-based, or a combination of both.
Futures exchanges generally specialize in a particular group of products.
For example, the Intercontinental Exchange (ICE) trades petroleum futures such as Brent crude, natural gas, and electricity futures. The Chicago Board of Trade (CBOT) trades agricultural, interest rate, and metals futures.
In those markets that maintain a trading floor, generally one product trades in one pit. The participants in the pits are mainly brokers, traders, hedgers, and spreaders. The different delivery months offered by each product are dependent on the deliverable product.
Many exchanges (for example, ICE and Euronext.liffe) have developed electronic trading. These platforms match buyers and sellers and report the execution to the clients, the entering member firm, and the clearing facility.
Showing posts with label markets. Show all posts
Showing posts with label markets. Show all posts
Tuesday, 27 July 2010
Tuesday, 13 July 2010
International and domestic markets
In some products, particularly bonds, there is an important distinction between domestic and international markets. In international bond markets, it may not be the case that securities denominated in a particular country's currency are actually traded in that country. Buyers and sellers of securities utilize offshore funds, and the settlement of transactions is usually conducted by an offshore institution. An example might be an issue of euro-denominated corporate bonds which are purchased by investors in Japan, and cleared through an offshore entity. The most common international bond market is the Eurobond market. Notwithstanding the name, Eurobonds are not exclusively issued or traded in Europe; the term is a generic one used for offshore bonds.
Transactions in short-term debt securities and money market deposits may also be conducted offshore.
In a domestic bond market, securities denominated in a particular currency are generally traded largely by investors domiciled in the country of that currency. Settlement procedures are usually specific to that country's financial system. It is not impossible for foreign investors to trade on domestic markets. US Treasury bonds are US domestic bond market instruments, but there are substantial foreign holdings of such bonds. The domicile of a bond issuer is not particularly relevant; a foreign issuer can issue bonds in a domestic market, while a domestic issuer can issue in international markets.
Transactions in short-term debt securities and money market deposits may also be conducted offshore.
In a domestic bond market, securities denominated in a particular currency are generally traded largely by investors domiciled in the country of that currency. Settlement procedures are usually specific to that country's financial system. It is not impossible for foreign investors to trade on domestic markets. US Treasury bonds are US domestic bond market instruments, but there are substantial foreign holdings of such bonds. The domicile of a bond issuer is not particularly relevant; a foreign issuer can issue bonds in a domestic market, while a domestic issuer can issue in international markets.
Exchange traded (ETD) markets and Over the counter (OTC) markets
Exchange Traded Market
In this Market, a central organization(the exchange) outlines the rules and regulation surrounding the financial transaction. Every transaction needs to be reported to the exchange.
Most common type of exchange are stock exchange and future exchange.
Egs
Although the foreign exchange forward market is predominantly OTC, a futures contract which references forward foreign exchange rates would be an exchange-traded product.
What do we mean by exchange?
What this means is that while you may be buying for example 100 shares of Google stock at the same time someone else is selling those shares, you do not buy those shares directly from the seller but instead from the exchange.
Advantage
The fact that the exchange stands on the other side of all trades in exchange traded markets is one of their key advantages as this removes counterparty risk, or the chance that the person who you are trading with will default on their obligations relating to the trade.
A second key advantage of exchange traded markets is that as all trades flow through one central place, the price that is quoted for a particular instrument is always the same regardless of the size or sophistication of the person or entity making the trade. This in theory should create a more level playing field which can be an advantage to the smaller and less sophisticated trader.
Lastly, because all firms that offer exchange traded products must be members and register with the exchange, there is greater regulatory oversight which can make exchange traded markets a much safer place for individuals to trade.
Disadvantage
The downside that is often cited about exchange traded markets is cost. As the firms who offer exchange traded products must meet high regulatory requirements to do so, this makes it more costly for them to offer these products, a cost that is inevitably passed along to the end user. Secondly, as all trades in exchange traded products must flow through the exchange this gives these for profit entities immense power when setting things such as exchange fees which can also increase transaction costs for the end user.
Over the Counter(OTC) Market
In this case financial transaction are consummated through private negotiation between counterparts.
Eg. Govt bonds,Corporate bonds,short term debt securities,interbank deposits syndicated loans,interest rate swaps
Eg. of both: Most govt bond trading is OTC. But many bonds are also listed on stock exchange.
Advantage
The biggest advantage to over the counter markets is that because there is no centralized exchange and little regulation, you have heavy competition between different providers to attract the most traders and trading volume to their firm. This being the case transaction costs are normally lower in over the counter markets when compared to similar products that trade on an exchange.
As there is no centralized exchange the firms that make prices in the instrument that is trading over the counter can make whatever price they want, and the quality of execution varies from firm to firm for the same instrument. While this is less of a problem in liquid markets such as FX where there are multiple price reference sources, it can be a problem in less highly traded instruments.
Disadvantage
While the lack of regulation can be seen as an advantage in the above sense it can also be seen as a disadvantage, as the low barriers to entry and lack of heavy oversight also make it easier for firms offering trading to operate in a dishonest or fraudulent way.
Lastly, as there is no centralized exchange the firm that you trade with when you trade in an over the counter market like forex is the counterparty to your trade, so if something happens to that firm you are in danger of loosing not only the trades you have with that firm but also your account balance.
It is for these reasons that there is so much focus among forex traders as to which firm to trade with, with special attention being paid to the financial stability of the firm and the execution that they provide.
See the trading locations of Exchanges and OTC markets.
In this Market, a central organization(the exchange) outlines the rules and regulation surrounding the financial transaction. Every transaction needs to be reported to the exchange.
Most common type of exchange are stock exchange and future exchange.
Egs
Although the foreign exchange forward market is predominantly OTC, a futures contract which references forward foreign exchange rates would be an exchange-traded product.
What do we mean by exchange?
What this means is that while you may be buying for example 100 shares of Google stock at the same time someone else is selling those shares, you do not buy those shares directly from the seller but instead from the exchange.
Advantage
The fact that the exchange stands on the other side of all trades in exchange traded markets is one of their key advantages as this removes counterparty risk, or the chance that the person who you are trading with will default on their obligations relating to the trade.
A second key advantage of exchange traded markets is that as all trades flow through one central place, the price that is quoted for a particular instrument is always the same regardless of the size or sophistication of the person or entity making the trade. This in theory should create a more level playing field which can be an advantage to the smaller and less sophisticated trader.
Lastly, because all firms that offer exchange traded products must be members and register with the exchange, there is greater regulatory oversight which can make exchange traded markets a much safer place for individuals to trade.
Disadvantage
The downside that is often cited about exchange traded markets is cost. As the firms who offer exchange traded products must meet high regulatory requirements to do so, this makes it more costly for them to offer these products, a cost that is inevitably passed along to the end user. Secondly, as all trades in exchange traded products must flow through the exchange this gives these for profit entities immense power when setting things such as exchange fees which can also increase transaction costs for the end user.
Over the Counter(OTC) Market
In this case financial transaction are consummated through private negotiation between counterparts.
Eg. Govt bonds,Corporate bonds,short term debt securities,interbank deposits syndicated loans,interest rate swaps
Eg. of both: Most govt bond trading is OTC. But many bonds are also listed on stock exchange.
Advantage
The biggest advantage to over the counter markets is that because there is no centralized exchange and little regulation, you have heavy competition between different providers to attract the most traders and trading volume to their firm. This being the case transaction costs are normally lower in over the counter markets when compared to similar products that trade on an exchange.
As there is no centralized exchange the firms that make prices in the instrument that is trading over the counter can make whatever price they want, and the quality of execution varies from firm to firm for the same instrument. While this is less of a problem in liquid markets such as FX where there are multiple price reference sources, it can be a problem in less highly traded instruments.
Disadvantage
While the lack of regulation can be seen as an advantage in the above sense it can also be seen as a disadvantage, as the low barriers to entry and lack of heavy oversight also make it easier for firms offering trading to operate in a dishonest or fraudulent way.
Lastly, as there is no centralized exchange the firm that you trade with when you trade in an over the counter market like forex is the counterparty to your trade, so if something happens to that firm you are in danger of loosing not only the trades you have with that firm but also your account balance.
It is for these reasons that there is so much focus among forex traders as to which firm to trade with, with special attention being paid to the financial stability of the firm and the execution that they provide.
See the trading locations of Exchanges and OTC markets.
Monday, 12 July 2010
Financial Markets - An Introduction
Participants in markets
People - Investors, borrowers and agents who bring these 2 together
Products - We will see it
Places - Not a physical place but connected through sophisticated markets.
The Size of Financial Markets
The importance of modern financial markets is evidenced by their enormous scale. The value of total global financial assets outstanding in 2007 was estimated as USD 196 trillion, which was itself USD 29 trillion larger than the same estimate a year earlier.
It is estimated that the value of global financial assets represents three times the current level of global GDP, but even this huge number does not encompass all of the activity. Most importantly, it does not include the substantial market in foreign exchange (FX). At the time of its 2007 market survey, the BIS estimated that daily trading volumes in the FX market were of the order of USD 3.2 trillion – and they have probably increased since then.
Financial Market Turnover
Naturally, a rapidly growing market requires a constant supply of new instruments and assets. (The BIS estimated that in 2008 USD 2.35 trillion worth of international bonds were issued.) Markets must be sufficiently developed in order to sell instruments to potential investors.
However, activity in financial markets is not simply restricted to transactions in new instruments; such trades are called primary market transactions. There is often a significant (and in many cases larger) secondary market that encompasses trades in outstanding instruments. For instance, a share of common stock in a company can change hands many times after its initial issuance. Secondary markets, particularly those covering equities, are substantial. According to the World Federation of Exchanges (WFE), the total number of transactions in equity shares on its member exchanges reached almost 14 trillion in 2008.
Geography
It is perhaps no surprise that the bulk of the world's financial assets are concentrated in few major areas:
Area Per cent (rough idea)
US 30
Western Europe 25
Japan 10
UK 5
But you don't have to be present at particular place to enter into transaction. Instead you can enter into deal from any part of the world through sophisticated internet etc.
Functions of Markets
1. Price discovery and asset valuation.
2. Capital opportunities
3. Short term financing
4. Investment opportunities
5. Financial risk management
People - Investors, borrowers and agents who bring these 2 together
Products - We will see it
Places - Not a physical place but connected through sophisticated markets.
The Size of Financial Markets
The importance of modern financial markets is evidenced by their enormous scale. The value of total global financial assets outstanding in 2007 was estimated as USD 196 trillion, which was itself USD 29 trillion larger than the same estimate a year earlier.
It is estimated that the value of global financial assets represents three times the current level of global GDP, but even this huge number does not encompass all of the activity. Most importantly, it does not include the substantial market in foreign exchange (FX). At the time of its 2007 market survey, the BIS estimated that daily trading volumes in the FX market were of the order of USD 3.2 trillion – and they have probably increased since then.
Financial Market Turnover
Naturally, a rapidly growing market requires a constant supply of new instruments and assets. (The BIS estimated that in 2008 USD 2.35 trillion worth of international bonds were issued.) Markets must be sufficiently developed in order to sell instruments to potential investors.
However, activity in financial markets is not simply restricted to transactions in new instruments; such trades are called primary market transactions. There is often a significant (and in many cases larger) secondary market that encompasses trades in outstanding instruments. For instance, a share of common stock in a company can change hands many times after its initial issuance. Secondary markets, particularly those covering equities, are substantial. According to the World Federation of Exchanges (WFE), the total number of transactions in equity shares on its member exchanges reached almost 14 trillion in 2008.
Geography
It is perhaps no surprise that the bulk of the world's financial assets are concentrated in few major areas:
Area Per cent (rough idea)
US 30
Western Europe 25
Japan 10
UK 5
But you don't have to be present at particular place to enter into transaction. Instead you can enter into deal from any part of the world through sophisticated internet etc.
Functions of Markets
1. Price discovery and asset valuation.
2. Capital opportunities
3. Short term financing
4. Investment opportunities
5. Financial risk management
Thursday, 8 July 2010
Instruments in the money markets
Money market instruments are generally characterized by a high degree of safety of principal and are most commonly issued in units of $1 million or more. Maturities range from one day to one year; the most common are three months or less. Active secondary markets for most of the instruments allow them to be sold prior to maturity. Unlike organized securities or commodities exchanges, the money market has no specific
location. Available from financial institutions, money markets give the smaller investor the opportunity to get in on treasury securities. The institution buys a variety of treasury securities with the money you invest. The rate of return changes daily, and services such as check writing may be offered.
The range of products enables user to spread their exposures before differing:
The major participants in the money market are commercial banks, governments, corporations, government-sponsored enterprises, money market mutual funds; futures market exchanges, brokers and dealers. Some of the money market instruments are:
a. Treasury Bills(T-bills)
Treasury bills (T-bills) are short-term notes with maturity period less than 1 year. In US, they come in three different lengths to maturity:90, 180, and 360 days. The two shorter types are auctioned on a weekly basis, while the annual types are auctioned monthly. T-bills can be purchased directly through the auctions or indirectly through the secondary market. Purchasers of T-bills at auction can enter a competitive bid (although this method entails a risk that the bills may not be made available at the bid price) or a noncompetitive bid. T-bills for noncompetitive bids are supplied at the average price of all successful competitive bids.
These are issued by the Reserve Bank usually a period of 91 days. The Reserve Bank uses these bills to take money out of the market. This will reduce a banks ability to lend to its clients leading to a contraction of the money supply. The bill consists of an obligation to pay the bearer the face value of the bill upon a given date. A bank buying such a bill will not pay face value for it but would instead buy it at a discount. The bill is tradable so
the purchaser does not have to hold it until the due date. If interest rates decrease during the term of the bill, the holder can sell the bill at a profit before the due date.
b. Bankers Acceptance(BA)
"A banker's acceptance begins life as a written demand for the bank to pay a given sum at a future date," Brealey and Myers noted. "The bank then agrees to this demand by writing 'accepted' on it. Once accepted, the draft becomes the bank's IOU and is a negotiable security. This security can then be bought or sold at a discount slightly greater than the discount on Treasury bills of the same maturity." Bankers' acceptances are generally used to finance foreign trade, although they also arise when companies purchase goods on credit or need to finance inventory. The maturity of acceptances ranges from one to six months.
Although BA’s, as they are known, have their origin in trade bills issued by merchants, today they are an important money market instrument. A banker’s acceptance is simply a bill of exchange drawn by a person and accepted by a bank. The person drawing the bill must have a good credit rating otherwise the
BA will not be tradable. The drawer promises to make payment of the face value upon a given future date. The most common term for these instruments is 90 days. They can very from 30 days to180 days. The BA has the advantage of locking the borrower in to a fixed rate over the term of the bill. This can be important if a rise in short-term rates is expected.
c. CERTIFICATES OF DEPOSIT. Certificates of deposit (CDs) are certificates issued by a federally chartered bank against deposited funds that earn a specified return for a definite period of time. They are one of several types of interest-bearing "time deposits" offered by banks. An individual or company lends the bank a certain amount of money for a fixed period of time, and in exchange the bank agrees to repay the money with specified interest at the end of the time period. The certificate constitutes the bank's agreement to repay the loan. The maturity rates on CDs range from 30 days to six months or longer, and the amount of the face value can vary greatly as well. There is usually a penalty for early withdrawal of funds, but some types of CDs can be sold to another investor if the original purchaser needs access to the money before the maturity date.
Large denomination (jumbo) CDs of $100,000 or more are generally negotiable and pay higher interest than smaller denominations. However, such certificates are insured by the FDIC only up to $100,000. There are also eurodollar CDs, which are negotiable certificates issued against U.S. dollar obligations in a foreign branch of a domestic bank. Brokerage firms have a nationwide pool of bank CDs and receive a fee for selling them. Since brokers deal in large sums, brokered CDs generally pay higher interest rates and offer greater liquidity than CDs purchased directly from a bank.
d. Negotiable Certificates of Deposit (NCD)
NCD’s are like fixed deposits except they are bearer documents. They offer a market related rate of interest and are completely liquid because they can be negotiated during the term of the deposit. Most NCD’s have a term of less than one year. They usually offer a rate of return slightly higher than banker’s acceptances which makes them extremely popular instruments.
e. Deposits
f. REPURCHASE AGREEMENTS (Repo or buyback) and Reverse Repo
These also known as repos or buybacks—are Treasury securities that are purchased from a dealer with the agreement that they will be sold back at a future date for a higher price. These agreements are the most liquid of all money market investments, ranging from 24 hours to several months. In fact, they are very similar to bank deposit accounts, and many corporations arrange for their banks to transfer excess cash to such funds automatically.
A repo agreement is the sale of a security with a commitment to repurchase the same security as a specified price and on specified date while a reverse repo is purchase of security with a commitment to sell at predetermined price and date. A repo transaction for party would mean reverse repo for the second party. In liew of the loan, the borrower pays a contracted rate to the lender, which is called the repo rate. As against the call money market where the lending is totally unsecured, the lending in the repo is backed by a simultaneous transfer of securities. The main players in this market are all institutional players like banks, primary dealers like PNB Gilts Limited, financial institutions, mutual funds, insurance companies etc. allowed to operate a SGL with the Reserve Bank of India.
Further RBI also operates daily repo/ reverse repo auctions to provide a benchmark rates in the markets as well as managing in the liquidity in the system. RBI sucks or injects liquidity in the banking system by daily repo/ reverse operations.
g. Tax-Exempt Bonds
Often referred to as municipal bonds, tax-exempt bonds represent state and local government debt. A City, town, or a village and also states, territories, and housing authorities, port authorities, and local government agencies may issue these bonds. Interest earned is exempt from income taxes and from state and local income taxes if bonds issued are from your state or city. Interest rates are determined by the general level of
interest rates and by the credit rating of the issuer. The seller of these bonds has tables showing you what the taxexempt yields of these bonds are equivalent to in taxable yield for your tax bracket. As little as $1,000 may be invested in these bonds, available from a broker or a financial institution.
Type 3 investments include corporate bonds and corporate stocks. Higher investment risk and lower purchasing power risk are represented by these investment alternatives.
i. COMMERCIAL PAPER(CP).
Commercial paper refers to unsecured short-term promissory notes issued by financial and nonfinancial corporations. Commercial paper has maturities of up to 270 days (the maximum allowed without SEC registration requirement). Dollar volume for commercial paper exceeds the amount of any money market instrument other than T-bills. It is typically issued by large, credit-worthy corporations with unused lines of bank credit and therefore carries low default risk.
Standard and Poor's and Moody's provide ratings regarding the quality of commercial paper. The highest ratings are A1 and P1, respectively. A2 and P2 paper is considered high quality, but usually indicates that the issuing corporation is smaller or more debt burdened than A1 and P1 companies. Issuers earning the lowest ratings find few willing investors.
Unlike some other types of money-market instruments, in which banks act as intermediaries between buyers and sellers, commercial paper is issued directly by well-established companies, as well as by financial institutions. "By cutting out the intermediary, major companies are able to borrow at rates that may be 1 to 1 ½ percent below the prime rate charged by banks," according to Brealey and Myers. Banks may act as agents in the transaction, but they assume no principal position and are in no way obligated with respect to repayment of the commercial paper. Companies may also sell commercial paper through dealers who charge a fee and arrange for the transfer of the funds from the lender to the borrower.
location. Available from financial institutions, money markets give the smaller investor the opportunity to get in on treasury securities. The institution buys a variety of treasury securities with the money you invest. The rate of return changes daily, and services such as check writing may be offered.
The range of products enables user to spread their exposures before differing:
- maturity
- currencies
- credit risks
- structures
The major participants in the money market are commercial banks, governments, corporations, government-sponsored enterprises, money market mutual funds; futures market exchanges, brokers and dealers. Some of the money market instruments are:
a. Treasury Bills(T-bills)
Treasury bills (T-bills) are short-term notes with maturity period less than 1 year. In US, they come in three different lengths to maturity:90, 180, and 360 days. The two shorter types are auctioned on a weekly basis, while the annual types are auctioned monthly. T-bills can be purchased directly through the auctions or indirectly through the secondary market. Purchasers of T-bills at auction can enter a competitive bid (although this method entails a risk that the bills may not be made available at the bid price) or a noncompetitive bid. T-bills for noncompetitive bids are supplied at the average price of all successful competitive bids.
These are issued by the Reserve Bank usually a period of 91 days. The Reserve Bank uses these bills to take money out of the market. This will reduce a banks ability to lend to its clients leading to a contraction of the money supply. The bill consists of an obligation to pay the bearer the face value of the bill upon a given date. A bank buying such a bill will not pay face value for it but would instead buy it at a discount. The bill is tradable so
the purchaser does not have to hold it until the due date. If interest rates decrease during the term of the bill, the holder can sell the bill at a profit before the due date.
b. Bankers Acceptance(BA)
"A banker's acceptance begins life as a written demand for the bank to pay a given sum at a future date," Brealey and Myers noted. "The bank then agrees to this demand by writing 'accepted' on it. Once accepted, the draft becomes the bank's IOU and is a negotiable security. This security can then be bought or sold at a discount slightly greater than the discount on Treasury bills of the same maturity." Bankers' acceptances are generally used to finance foreign trade, although they also arise when companies purchase goods on credit or need to finance inventory. The maturity of acceptances ranges from one to six months.
Although BA’s, as they are known, have their origin in trade bills issued by merchants, today they are an important money market instrument. A banker’s acceptance is simply a bill of exchange drawn by a person and accepted by a bank. The person drawing the bill must have a good credit rating otherwise the
BA will not be tradable. The drawer promises to make payment of the face value upon a given future date. The most common term for these instruments is 90 days. They can very from 30 days to180 days. The BA has the advantage of locking the borrower in to a fixed rate over the term of the bill. This can be important if a rise in short-term rates is expected.
c. CERTIFICATES OF DEPOSIT. Certificates of deposit (CDs) are certificates issued by a federally chartered bank against deposited funds that earn a specified return for a definite period of time. They are one of several types of interest-bearing "time deposits" offered by banks. An individual or company lends the bank a certain amount of money for a fixed period of time, and in exchange the bank agrees to repay the money with specified interest at the end of the time period. The certificate constitutes the bank's agreement to repay the loan. The maturity rates on CDs range from 30 days to six months or longer, and the amount of the face value can vary greatly as well. There is usually a penalty for early withdrawal of funds, but some types of CDs can be sold to another investor if the original purchaser needs access to the money before the maturity date.
Large denomination (jumbo) CDs of $100,000 or more are generally negotiable and pay higher interest than smaller denominations. However, such certificates are insured by the FDIC only up to $100,000. There are also eurodollar CDs, which are negotiable certificates issued against U.S. dollar obligations in a foreign branch of a domestic bank. Brokerage firms have a nationwide pool of bank CDs and receive a fee for selling them. Since brokers deal in large sums, brokered CDs generally pay higher interest rates and offer greater liquidity than CDs purchased directly from a bank.
d. Negotiable Certificates of Deposit (NCD)
NCD’s are like fixed deposits except they are bearer documents. They offer a market related rate of interest and are completely liquid because they can be negotiated during the term of the deposit. Most NCD’s have a term of less than one year. They usually offer a rate of return slightly higher than banker’s acceptances which makes them extremely popular instruments.
e. Deposits
- Call deposits - are transactions that the depositor has the right to call at any time, depending on the notice period agreed at the time the deal was transacted(normally 1 - 7 days)
- Fixed deposit ( term or time deposit ) Under this scheme money is deposited for a fixed period of time so it is also called Fixed Deposit. Investor can withdraw the money only after the time period. Premature withdrawals are also allowed by paying a penalty. Interest is calculated on monthly, quarterly or yearly depends on the bank and scheme. Many banks offers loan or overdraft facility as an added features with fixed deposits. Term deposits is a safe investment and it is therefore a very good option for conservative, low-risk investors.
- Overnight lending - are usually midday to midday, where an averaged overnight rate of interest is used. The rate in euro area is called Eonia(Euro overnight indexed average rate). It represents the effective overnight reference rate for euro and is calculated by the weighted of all overnight unsecured euro lending transactions undertaken in the internet bank. In the US, federal fund rate is the interest rate at which the banks lend to each other on overnight basis.
f. REPURCHASE AGREEMENTS (Repo or buyback) and Reverse Repo
These also known as repos or buybacks—are Treasury securities that are purchased from a dealer with the agreement that they will be sold back at a future date for a higher price. These agreements are the most liquid of all money market investments, ranging from 24 hours to several months. In fact, they are very similar to bank deposit accounts, and many corporations arrange for their banks to transfer excess cash to such funds automatically.
A repo agreement is the sale of a security with a commitment to repurchase the same security as a specified price and on specified date while a reverse repo is purchase of security with a commitment to sell at predetermined price and date. A repo transaction for party would mean reverse repo for the second party. In liew of the loan, the borrower pays a contracted rate to the lender, which is called the repo rate. As against the call money market where the lending is totally unsecured, the lending in the repo is backed by a simultaneous transfer of securities. The main players in this market are all institutional players like banks, primary dealers like PNB Gilts Limited, financial institutions, mutual funds, insurance companies etc. allowed to operate a SGL with the Reserve Bank of India.
Further RBI also operates daily repo/ reverse repo auctions to provide a benchmark rates in the markets as well as managing in the liquidity in the system. RBI sucks or injects liquidity in the banking system by daily repo/ reverse operations.
g. Tax-Exempt Bonds
Often referred to as municipal bonds, tax-exempt bonds represent state and local government debt. A City, town, or a village and also states, territories, and housing authorities, port authorities, and local government agencies may issue these bonds. Interest earned is exempt from income taxes and from state and local income taxes if bonds issued are from your state or city. Interest rates are determined by the general level of
interest rates and by the credit rating of the issuer. The seller of these bonds has tables showing you what the taxexempt yields of these bonds are equivalent to in taxable yield for your tax bracket. As little as $1,000 may be invested in these bonds, available from a broker or a financial institution.
Type 3 investments include corporate bonds and corporate stocks. Higher investment risk and lower purchasing power risk are represented by these investment alternatives.
i. COMMERCIAL PAPER(CP).
Commercial paper refers to unsecured short-term promissory notes issued by financial and nonfinancial corporations. Commercial paper has maturities of up to 270 days (the maximum allowed without SEC registration requirement). Dollar volume for commercial paper exceeds the amount of any money market instrument other than T-bills. It is typically issued by large, credit-worthy corporations with unused lines of bank credit and therefore carries low default risk.
Standard and Poor's and Moody's provide ratings regarding the quality of commercial paper. The highest ratings are A1 and P1, respectively. A2 and P2 paper is considered high quality, but usually indicates that the issuing corporation is smaller or more debt burdened than A1 and P1 companies. Issuers earning the lowest ratings find few willing investors.
Unlike some other types of money-market instruments, in which banks act as intermediaries between buyers and sellers, commercial paper is issued directly by well-established companies, as well as by financial institutions. "By cutting out the intermediary, major companies are able to borrow at rates that may be 1 to 1 ½ percent below the prime rate charged by banks," according to Brealey and Myers. Banks may act as agents in the transaction, but they assume no principal position and are in no way obligated with respect to repayment of the commercial paper. Companies may also sell commercial paper through dealers who charge a fee and arrange for the transfer of the funds from the lender to the borrower.
Money markets
Definition of the Money Market
The money market is the market where the buying, selling, lending, and borrowing of short-term funds occur.
It is not a physical market; instead, all participants are linked by a sophisticated network of telephones and computers.
The short-term nature of the money market is its major distinguishing feature. Transactions in the money market are for one year or less. This contrasts with the capital market where transactions are long-term in nature, that is, greater than one year.
Main Players :
Mainly it is
1. International Money markets where transaction involves currency other than domestic currency.
2. Interbank markets, where transactions are actually carried out between banks.
In case of India, it is Reserve bank of India (RBI), Discount and Finance House of India (DFHI), mutual funds, banks, corporate investor, non-banking finance companies (NBFCs), state governments, provident funds, Primary dealers. Securities Trading Corporation of India (STCI), public sector undertaking (PSUs), non-resident Indians and overseas corporate bodies.
Characteristics of Money markets
Money markets are
1. global - It doesnt have central trading floor. Instead they form global OTC market, connected by sophisticated networks and telephone lines, that operate on 24 hour basis.
2. Wholesale - These transactions have corporations, banks, brokers, dealers and central authorities.
3. Short term - It has short maturity and hence its instruments are called cash instruments.
Functions of the Money Market:
A money market is generally expected to perform three broad functions:
1. Provide a balancing mechanism to even out the demand for and supply of short term funds
2. Provide a focal point for central bank intervention for influencing liquidity and general level of interest rates in the economy.
3. Provide reasonable access to suppliers and users of short term funds to fulfill their borrowings and investment requirements at an efficient market clearing price.
Besides the above functions, a well functioning money market facilitates the development of a market for longer term securities. The interest rates for extremely short term use of money serve as a benchmark for longer term financial instruments.
Benefits of an Efficient Money Market:
An efficient money market benefits a number of players. It provides a stable source of funds to banks in addition to deposits allowing alternative financing structures and competition. It allows banks to manage risks arising from interest rate fluctuations and to manage the maturity structure of their assets and liabilities.
A developed inter-bank market provides the basis for growth and liquidity in the money including the secondary market for commercial paper and treasury bills.
An efficient money market encourages the development of non-bank intermediaries thus increasing the competition for funds. Savers get a wide array of savings instruments to choose from and invest their savings.
A liquid money market provides an effective source of long term finance to borrowers. Large borrowers can lower the cost of raising funds and manage short term funding or surplus efficiently.
A liquid and vibrant money market is necessary for the development of a capital market, foreign exchange market, and market in derivative instruments. The money market supports the long term debt market by increasing the liquidity of securities. The existence of an efficient money market is a precondition for the development of a government securities market and a forward foreign exchange market.
Trading in forwards, swaps, and futures is also supported by a liquid money market as the certainty of prompt cash settlement is essential for such transactions. The government can achieve better pricing on its debt as it provides access to a wide range of buyers. It facilitates the government market borrowing.
Monetary control through indirect methods (repos and open market operations) is more effective if the money market is liquid. In such a market response to the central bank’s policy actions are both faster and less subject to distortion.
The Indian Money Market:
The average turnover of the money market in India is over Rs 40,000 crore daily. This is more than 3 per cent of the total money supply in the Indian economy and 6 percent of the total funds that commercial banks have let out to the system. This implies that 2 per cent of the annual GDP of India gets traded in the money market in just one day. Even though the money market is many times larger than the capital market, it is not even a fraction of the daily trading in developed markets.
The money market is the market where the buying, selling, lending, and borrowing of short-term funds occur.
It is not a physical market; instead, all participants are linked by a sophisticated network of telephones and computers.
The short-term nature of the money market is its major distinguishing feature. Transactions in the money market are for one year or less. This contrasts with the capital market where transactions are long-term in nature, that is, greater than one year.
Main Players :
Mainly it is
1. International Money markets where transaction involves currency other than domestic currency.
2. Interbank markets, where transactions are actually carried out between banks.
In case of India, it is Reserve bank of India (RBI), Discount and Finance House of India (DFHI), mutual funds, banks, corporate investor, non-banking finance companies (NBFCs), state governments, provident funds, Primary dealers. Securities Trading Corporation of India (STCI), public sector undertaking (PSUs), non-resident Indians and overseas corporate bodies.
Characteristics of Money markets
Money markets are
1. global - It doesnt have central trading floor. Instead they form global OTC market, connected by sophisticated networks and telephone lines, that operate on 24 hour basis.
2. Wholesale - These transactions have corporations, banks, brokers, dealers and central authorities.
3. Short term - It has short maturity and hence its instruments are called cash instruments.
Functions of the Money Market:
A money market is generally expected to perform three broad functions:
1. Provide a balancing mechanism to even out the demand for and supply of short term funds
2. Provide a focal point for central bank intervention for influencing liquidity and general level of interest rates in the economy.
3. Provide reasonable access to suppliers and users of short term funds to fulfill their borrowings and investment requirements at an efficient market clearing price.
Besides the above functions, a well functioning money market facilitates the development of a market for longer term securities. The interest rates for extremely short term use of money serve as a benchmark for longer term financial instruments.
Benefits of an Efficient Money Market:
An efficient money market benefits a number of players. It provides a stable source of funds to banks in addition to deposits allowing alternative financing structures and competition. It allows banks to manage risks arising from interest rate fluctuations and to manage the maturity structure of their assets and liabilities.
A developed inter-bank market provides the basis for growth and liquidity in the money including the secondary market for commercial paper and treasury bills.
An efficient money market encourages the development of non-bank intermediaries thus increasing the competition for funds. Savers get a wide array of savings instruments to choose from and invest their savings.
A liquid money market provides an effective source of long term finance to borrowers. Large borrowers can lower the cost of raising funds and manage short term funding or surplus efficiently.
A liquid and vibrant money market is necessary for the development of a capital market, foreign exchange market, and market in derivative instruments. The money market supports the long term debt market by increasing the liquidity of securities. The existence of an efficient money market is a precondition for the development of a government securities market and a forward foreign exchange market.
Trading in forwards, swaps, and futures is also supported by a liquid money market as the certainty of prompt cash settlement is essential for such transactions. The government can achieve better pricing on its debt as it provides access to a wide range of buyers. It facilitates the government market borrowing.
Monetary control through indirect methods (repos and open market operations) is more effective if the money market is liquid. In such a market response to the central bank’s policy actions are both faster and less subject to distortion.
The Indian Money Market:
The average turnover of the money market in India is over Rs 40,000 crore daily. This is more than 3 per cent of the total money supply in the Indian economy and 6 percent of the total funds that commercial banks have let out to the system. This implies that 2 per cent of the annual GDP of India gets traded in the money market in just one day. Even though the money market is many times larger than the capital market, it is not even a fraction of the daily trading in developed markets.
Subscribe to:
Posts (Atom)