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Topic 3 Money and Foreign Exchange Market

This document provides an overview of topics to be covered in a lesson on money and foreign exchange markets. Students will learn about the development and structure of the money market, the participants and their operations, the two categories of money market operations, financial instruments available and how to calculate them. They will also learn how to identify the main risks in the money market, including credit risk, liquidity risk, interest rate risk, and operational risk, and how these risks can be controlled. The lesson will also cover foreign exchange markets.

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azwan ayop
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149 views

Topic 3 Money and Foreign Exchange Market

This document provides an overview of topics to be covered in a lesson on money and foreign exchange markets. Students will learn about the development and structure of the money market, the participants and their operations, the two categories of money market operations, financial instruments available and how to calculate them. They will also learn how to identify the main risks in the money market, including credit risk, liquidity risk, interest rate risk, and operational risk, and how these risks can be controlled. The lesson will also cover foreign exchange markets.

Uploaded by

azwan ayop
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Topic 3

Money and
foreign exchange market

MFK FIN536 Topic 3 1


At the end of the lessons, students should be able to:-

 Understand the development and structure of money market.

 Understand the operations, risks and the participants of money


market.

 Differentiate between the two categories of money market


operations.

 Describe the financial instrument available in the money market and


understand simple calculation of the instruments.

 Identify the risk in money market and how to control the risks

MFK FIN536 Topic 3 2


MFK FIN536 Topic 1 3
 Movement of funds among the surplus and the deficit
unit.

 Provide liquidity – buying and selling of money


market instruments.

 Invest and trade in variety of short-term debt


instruments.

 Over-the-counter and exchanges.

 Activities: lending and borrowing of funds.

 Backed by an active secondary market.

MFK FIN536 Topic 3 4


 Test 1
• On 13/08/09
• Topic 1, 2 and 3
• 8.00 pm to 9.30 pm
• AC572

MFK FIN536 Topic 3 5


 Provide facilities for adjusting portfolio over the short
term.

 For government: implement monetary policy and funding


of debts.

 Short term mobilization of funds among market


participants.

 Market for trading financial instruments among the SU


and DU in the financial system.

 Maturity – overnight to one year.

MFK FIN536 Topic 3 6


 Derived from the activities of borrowing and
lending funds in the professional inter-bank
market.

 As the rate is arrived at objectively, the KLIBOR is


used by some banks as a benchmark for pricing
loans to corporate bodies as well for the pricing
of other money market instruments.

MFK FIN536 Topic 3 7


 New interest rate framework announced by BNM
in April 2004.

 Indicator of the monetary policy stance and at


the same time as the target rate for the day-to-
day liquidity operations of BNM.

MFK FIN536 Topic 3 8


 Prior to 1987.

 During 1987.

 Government promote secondary market


◦ Set up cheque clearing system
◦ Reduce SRR and MLR
◦ Include well capitalized finance companies
◦ Introduced KLIBOR: anchor rate

 1989.

MFK FIN536 Topic 3 9


 In 1990: Central Bank introduced
◦ Electronic fund transfer, SPEEDS and RAM

 1993: total 21 Islamic financial products.

 1994: full fledged Islamic Banking system.

 1995, established Malaysia Rating Corporation


Berhad.

 1996: introduced FAST.

MFK FIN536 Topic 3 10


MFK FIN536 Topic 3 11
MFK FIN536 Topic 3 12
 Banks borrow money from this market.

 Why?
◦ Do not have sufficient deposit base to fund loans
operations
◦ To meet statutory reserve & minimum liquidity
requirements

 Activities:
◦ Rediscounting of money market papers.

MFK FIN536 Topic 3 13


 Example:

◦ CIMB Bank needs RM100 million for a period of


one month.
◦ Obtained directly from other bank in the same
tenor.
◦ MBB place FD with CIMB.
◦ Rate is agreed by both party.

 Credit limit/ credit line.

MFK FIN536 Topic 3 14


 Conduct in a securities market.
i. outright sale/purchase of instrument
ii. Repurchase Agreement (REPO) market

 Deficit >>>

 Surplus>>>

MFK FIN536 Topic 3 15


 Trading of short term funds among MM players.

 Standard deals in interbank market:


◦ Overnight money
◦ 7-day money
◦ Money for 1,2 and 3 months

MFK FIN536 Topic 3 16


MFK FIN536 Topic 3 17
MFK FIN536 Topic 3 18
 A borrower not able to make payment on the
agreed maturity date.

 Managing the credit risk:-


◦ Credit limit.

MFK FIN536 Topic 3 19


 Bank not able to have easy access to funds in the
market.

 Not able to convert existing assets into cash at a


reasonable market price.

 Managing the liquidity risk:-


◦ Portfolio – mixture of short-term and long-term
instruments.

MFK FIN536 Topic 3 20


 Bank’s revenue is adversely affected by the
fluctuations in interest rates.

 Managing the interest rate risk:-


◦ Monitor and predict interest rates movement.

MFK FIN536 Topic 3 21


 Bad operational system of the parties in the money market.

 For example poor IT system, reporting system and


inexperience and incompetence personnel.

 Managing the operational risk:-


◦ Invest in a suitable system.
◦ Training and development.
◦ Compensation
◦ Conducive working environment.

MFK FIN536 Topic 3 22


At the end of the lessons, students should be able to:-

 Understand the development and structure of money market.

 Understand the operations, risks and the participants of money


market.

 Differentiate between the two categories of money market


operations.

 Describe the financial instrument available in the money market and


understand simple calculation of the instruments.

 Identify the risk in money market and how to control the risks

MFK FIN536 Topic 3 23


 Foreign exchange market.

MFK FIN536 Topic 2 24


THANK
YOU…

MFK FIN536 Topic 2 25

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