Money Markets b The money market is the
Money Markets b The money market is the financial market for short-term borrowing and lending , typically up to thirteen months b Banks lend to and borrow from each other, short-term financial instruments such as certificates of deposits (CDs) or enter into agreements such as repurchase agreements (repos
Advantages of Money Market Instruments b can be converted to cash quickly b relatively low cost b has a low price risk due to their short maturities
Trading of Money Market Instruments b Over-the-counter(OTC) trading -the trade in financial instruments such as stocks, bonds, commodities or derivatives directly between two parties b In the United States of America about 8, 000 stocks trade on the Over the Counter market
Trading- contd b The National Association of Securities Dealers (NASD) has facilitated trading over the counter companies to participate at the same level. b. The top tier of the electronic network is the National Market System, a listing of about 3, 000 stocks that meet the following requirements;
Requirements in OTC b The company has net tangible assets of at least US$ 2 million. b The company has capital and surplus of at least US$ 1 million. b The company has at least 500, 000 shares of common stock outstanding b The stock’s trading volume average at least 600, 000 shares per month or 30, 000 shares per day for six months.
Requirements in OTC- CONTD b The stock is distributed among at least 300 stockholders. b The bid price of the stock has been at least US$ 10 per share for at least 5 business b The stock has attracted at least 5 market makers for at least five business
Trading b The third market is the mechanism through which an investor buys a listed security from a seller without going through the exchange on which it is listed. b The fourth market on the other hand is the mechanism through which a financial institution buys a block of securities from another financial institution without using the services of a broker.
Trading of Instruments b Treasury bills are sold weekly through an auction b Commercial Paper is normally issued to provide liquidity or finance a firm’s investment in inventory and accounts receivable Normally traded through placement
Trading of Instruments b Negotiable Certificate of Deposits are issued by large commercial banks and other depository institutions as a short term source of funds b Placement of certificate of deposits is either direct or through a correspondent institution that specializes in placing NCDs.
Trading of Instruments b b b Repurchase Agreements are normally negotiated through a telecommunication network. Dealers and repo brokers act as financial intermediaries to create repos for firms with deficient and excess funds receiving a commission for their services. Federal Funds allows depository institutions to effectively lend or borrow short term funds from each other at an agreed rate. Negotiations may take place between two depository institutions directly over the communication network or through a broker Banker’s Acceptances indicate that a bank accepts responsibility for a future payment. Exporters can hold a banker’s acceptance until the date at which payment is to be made but frequently sell the acceptance before then at a discount to obtain cash immediately
- Slides: 10