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The money market is the arena in which financial institutions make available to a broad range of
borrowers and investors the opportunity to buy and sell various forms of short-term securities which
are highly liquid and are relatively low-risk debt instruments. The maturities of money market
instruments range from one day to one year and are often less than 90 days. It comprises of the call
and notice money market, repo market and the market for debt instruments . There is no physical
"money market." Instead it is an informal network of banks and traders linked by telephones, fax
machines, and computers.

Banks financial institutions, companies and government are the key participants in the money
market. The size of the transactions in the money market typically is large ($100,000 or more).At the
center of this web is the central bank whose policies have an important bearing on the interest rates
in the money markets. The money market provides an equilibrium mechanism for levelling out the
demand and supply of short term funds and serves as a focal point for the intervention by the central
bank (RBI in India) for influencing the liquidity and interest rates in the financial systems.The
money market is important for businesses because it allows companies with a temporary cash
surplus to invest in short-term securities; conversely, companies with a temporary cash shortfall can
sell securities or borrow funds on a short-term basis. In essence the market acts as a repository for
short-term funds. Large corporations generally handle their own short-term financial transactions;
they participate in the market through dealers. Small businesses, on the other hand, often choose to
invest in money-market funds, which are professionally managed mutual funds consisting only of
short-term securities.

Although securities purchased on the money market carry less risk than long-term debt, they are still
not entirely risk free. After all, banks do sometimes fail, and the fortunes of companies can change
rather rapidly. The low risk is associated with lender selectivity. The lender who offers funds with
almost instant maturities ("tomorrow") cannot spend too much time qualifying borrowers and thus
selects only blue-chip borrowers. Repayment therefore is assured (unless you caught Enron just
before it suddenly nose-dived). Borrowers with fewer credentials, of course, have difficult getting
money from this market unless it is through well-established funds.
The various money instruments used abroad are listed below:

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 ‘ Treasury Bills  ‘ Repurchase Agreements or outright

‘ ommercial papers Basis
 ‘ Repurchase agreement  ‘ "iscount Window
‘ Banker¶s acceptance
‘ Eurodollar deposits
‘ ‰ederal ‰unds
 ‘ Reserves Averaging  ‘ Repurchase
‘ Standing Lending & "eposit ‰acilities Operations(Government
 ‘ Treasury Bills  Bonds,Tresury bills,‰i"‰ Bonds,
‘ Bills of Exchange Government Guaranteed State
‘ ertificate of deposits Enterprises Bonds)

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  ‘ ommercial Papers
‘ Repurchase Agreements
S ‘ Al-Mudaraba Interbank Investment
‘ Islamic Inter bank heque learing
System
‘ Government Investment ertificate
‘ agamas Mudharabah Bonds
‘ Islamic Accepted Bills (IAB)
‘ Repurchase Agreements
‘ Sell and Buy Back Agreement (Islamic
Repo)
‘ Islamic Private "ebt Securities
 ‘ all Money market
‘ ommercial Paper
  ‘ ertificate of deposits
‘ Treasury Bills
‘ Repurchase Agreements
 ‘ Outright Transactions
*‘ Government Securities(treasury
 Notes,treasury Bonds,Treasury Indexed
Bonds)
*‘ Semi-Government securities(Promissory

note,Bonds,Indexed Bonds)
 ‘ Repurchase Agreement
*‘ Government Securities(treasury
Notes,treasury Bonds,Treasury Indexed
Bonds)
*‘ Semi-Government securities(Promissory
note,Bonds,Indexed Bonds)
 ‘‰ederal ‰unds
‘"isciunt window
 ‘ertificates of "eposit
‘Negotiable ertificate of "eposits
 ‘ Bilateral Repurchase Operations
‘ Bank of Thailand Bonds
‘ ‰oreign Exchange Swaps
 ‘ Treasury Bills
‘ Money Market Strips
 ‘ Government Guaranted
ommercial Paper
 ‘ Banker¶s Acceptance
‘ ommercial Paper
 ‘ Refinancing Mechanism(Intra-day
loans, Overnight loans, Lombard
 loans, Loans against collateral
guarantees)
 ‘ Repo Operations(Government
Bonds, ‰ederal Government Bills,
 Bank of Russia Bonds)
‘ Securities accepted as ollateral for
 Bank of Russia loans(Regional
Government bonds, redit
Institutions bonds, Mortgage
Backed bonds, Resident corporate
bonds, Bonds of international
financial institutions)
‘ urrency Swaps
‘ "eposit Operations(at ‰ixed rate
and at auction rate)
‘ommercial Papers
‘Banker¶s Acceptance
‘‰uture ontracts
‘Options

 ‘Eurodollar "s ‘Interest rate Swaps
‘Eurodollar Time "eposits ‘"iscount notes
‘Repurchase Agreements ‘Bonds
‘Treasury Bills ‘Money Market mutual ‰und

 -Treasury bills (or T-Bills) mature in one year or less. Like zero-coupon bonds, they
do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a
positive yield to maturity. Many regard Treasury bills as the least risky investment available to U.S.
investors. Regular weekly T-Bills are commonly issued with maturity dates of 28 days, 91 days, 182
days, and 364 days.

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!  - In the global money market, commercial paper is an unsecured promissory
note with a fixed maturity of 1 to 270 days. ommercial Paper is a money-market security issued
(sold) by large banks and corporations to get money to meet short term debt obligations (for
example, payroll), and is only backed by an issuing bank or corporation's promise to pay the face
amount on the maturity date specified on the note. Since it is not backed by collateral, only firms
with excellent credit ratings from a recognized rating agency will be able to sell their commercial
paper at a reasonable price.

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A certificate of deposit (") is a time deposit with a bank, which means that it cannot be withdrawn
on demand (like a checking account). A depositor deposits a certain amount for a fixed term and a
stated annual percentage rate. At the end of the fixed term (which can be anywhere from a month to
several years) the bank returns the deposit with accumulated interest. Since banks have a slightly
higher risk of default than the US government, "'s give a slightly higher return than a T-bill;
however, the ‰"I does insure "'s up to $100,000.

 !%& A Repurchase agreement (also known as a repo or Sale and Repurchase

Agreement) allows a borrower to use a financial security as collateral for a cash loan at a fixed rate
of interest. In a repo, the borrower agrees to sell immediately a security to a lender and also agrees to
buy the same security from the lender at a fixed price at some later date. A repo is equivalent to a
cash transaction combined with a forward contract.
!! !& A banker's acceptance, or BA, is a negotiable instrument or time draft drawn
on and accepted by a bank. Before acceptance, the draft is not an obligation of the bank; it is merely
an order by the drawer to the bank to pay a specified sum of money on a specified date to a named
person or to the bearer of the draft. Upon acceptance, which occurs when an authorized bank accepts
and signs it, the draft becomes a primary and unconditional liability of the bank. A banker's
acceptance is also a money market instrument ± a short-term discount instrument that usually arises
in the course of international trade.
''- In the United States, federal funds are overnight borrowings by banks to maintain
their bank reserves at the ‰ederal Reserve. Banks keep reserves at ‰ederal Reserve Banks to meet
their reserve requirements and to clear financial transactions. Transactions in the federal funds
market enable depository institutions with reserve balances in excess of reserve requirements to lend
reserves to institutions with reserve deficiencies. These loans are usually made for one day only, that
is, "overnight". The interest rate at which these deals are done is called the federal funds rate.
   - Eurodollars are dollar-denominated time deposits in banks outside the U.S.
(including branches of U.S. banks outside the U.S.). These are not limited to Europe, as the name
implies, but can be anywhere outside the U.S. Because the banks are outside of the U.S., the ‰ederal
Reserve board has no jurisdiction over them; hence they can operate under tighter margins without
as many regulations. This can allow the banks to make more money off the deposits and also makes
Eurodollars more risky, but this translates to higher interest. Eurodollar deposits are usually in the
millions and last less than 6 months; thus the average investor is out priced, but Eurodollars can be
invested in through money market funds. A variant of a Eurodollar time deposit is a Eurodollar ",
which is just like a U.S. " only that it's held outside the U.S.

 

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A repo, or repurchase agreement, is an overnight loan usually made by government security dealers.
The dealer will make an agreement with an investor to sell him securities overnight and then buy
them back at a slightly higher price the next day. The investor will make overnight interest equal to
the difference for which he buys and sells back the securities. Basically, a repo is a one day loan
with securities used as collateral. A term repo is a simply a repo with a longer term, like 30 or so
days. A reverse repo is when the investor holds the securities and sells them and buys them back
from the security dealer.

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All banks which are members of the ‰ederal Reserve System (which I believe is every legal U.S.
bank) are required to keep a certain amount of money in their reserve account, which is their deposit
with "the ‰ed." The money in their account is called "federal funds" and the amount of money they
are required keep is equal to the reserve ratio, which is set by the ‰ed, multiplied by the amount of
deposits in their bank. ‰or instance, if I deposit $100 in my bank and the reserve ratio is 10%, then
my bank must put another $10 in their ‰ederal Reserve account. At the end of the day, some banks
come up short while others have more than enough federal funds. In order to meet the legal
requirements, banks make overnight loans to each other at the "federal funds rate," which is also set
by the ‰ed. Although this was set up primarily as a means of securing banks and ensuring they had
enough funds, many large banks now use federal funds as one of their resources for funding.

(!! !‘&"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.

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The discount window is an instrument of monetary policy (usually controlled by
central banks) that allows eligible institutions to borrow money from the central bank, usually on a
short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions.
The term originated with the practice of sending a bank representative to a reserve bank teller
window when a bank needed to borrow money.[1] In the United States, the central bank is the
‰ederal Reserve.The interest rate charged on such loans by a central bank is called the discount rate,
base rate, or repo rate, and should not be confused with the Prime rate.

S   "& Money Market funds are open-end management investment
companies that are registered under the Investment ompany Act and regulated under rule 2a-7
under the Act, which utilize pooled cash investments from many individual (retail) and institutional
investors. The funds are structured to invest in a diversified portfolio of very short-term, high grade /
low-risk financial, corporate and government debt. Money market funds pay dividends that reflect
prevailing short-term interest rates.

 
) - In an interest rate swap, each counterparty agrees to pay either a fixed or
floating rate denominated in a particular currency to the other counterparty. The fixed or floating rate
is multiplied by a notional principal amount (say, US" 1 million). This notional amount is generally

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not exchanged between counterparties, but is used only for calculating the size of cash flows to be
exchanged. The most common interest rate swap is one where one counterparty A pays a fixed rate
(the swap rate) to counterparty B, while receiving a floating rate (usually pegged to a reference rate
such as LIBOR).

%!- In the U. S. , the purchase or sale by the ‰ederal Reserve of money market
instruments for retention or for indefinite disbursement, thus creating a drain or an influx into the
reserves of the banking system.

&S* * +-The Al-Mudaraba Interbank Investment (MII) enable IB" of

banks, (defined to include Bank Islam Malaysia), to obtain funds from another IB" of bank on a
Mudaraba (profit-sharing) basis. The period of investment is from overnight to 12 months. The
minimum amount of investment for the MII is RM50,000. The rate of return is based on the rate of
gross profit before distribution for investments of one year of the receiving bank, while the profit-
sharing ratio is negotiable. When an IB" O‰ bank obtains investment from another IB" of bank for
any period, the principal invested is repaid at the end of the period, together with a share of the profit
arising from the use of the fund by the receiving bank. All profit calculations are based on above
formula.
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% S*  agamas Mudharabah Bonds were introduced in 1 March 1994.
agamas Mudharabah Bonds involved with the purchase of Islamic housing debts by agamas from
institutions that provide Islamic housing finance to their clients and staff. The issuance of bonds are
based on Al-Mudharabah concept by agamas for finance these purchases. The purchase of housing
debt on Islamic principles by agamas is managed based on the Bai¶ Al-"ayn concept whereas the
issued of agamas Mudharabah bonds is based on the All-Mudharabah concept. Under this concept
the bondholder and agamas will share profits according to ratios agreed earlier together. The
agreements pertaining to the purchase of housing debt based on Islamic principles will be sealed
between agamas Berhad and Bank Islam Malaysia Berhad. agamas will purchase housing debts
amounting RM30 billion from Bank Islam. As a result of this agreements, a total of RM30 billion of
agamas Mudharabah Bonds is created. Government has distribute RM30 billion worth of bonds to
financial institution that offer Islamic banking.

In summary, money market instruments are characterized as short-term, highly marketable

investments, with an extremely low probability of default. Because the minimum investment is
generally large, money market securities are typically owned by individual investors indirectly in the
form of investment companies known as money market mutual funds, or, as they are usually called,
money market funds. Money market rates tend to move together, and most rates are very close to
each other for the same maturity. Treasury bill rates are less than the rates available on other money
market securities, approximately one-third of a percentage point, because of their risk-free nature.
This Money market exsists across the globe as we can see that in each and every country it is
practiced.

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The gap between the world¶s rich and poor countries largely comes down to the financial and
physical assets that create wealth. "eveloped economies possess more of this capital than developing
ones, and what they have usually incorporates more advanced technologies. The implication is clear:
A key aspect of economic advancement lies in poorer nations¶ capacity to acquire more capital and
scale the technological ladder. Emerging economies undertake some capital formation on their own,
but in this era of globalization, they increasingly rely on foreign capital.

Indeed, total capital flows to developing economies have skyrocketed from $104 billion in 1980 to
$472 billion in 2005.[1] The foreign capital has the potential to deliver enormous benefits to
developing nations. Besides helping bridge the gap between savings and investment in capital-scarce
economies, capital often brings with it modern technology and encourages development of more
mature financial sectors. apital flows have proven effective in promoting growth and productivity
in countries that have enough skilled workers and infrastructure. Some economists believe capital
flows also help discipline governments¶ macroeconomic policies.‰oreign institutional investors and
‰oreign "irect Investment are the two very common ways for forign capital.

'%+

‰oreign institutional investors means ³an institution established or incorpoprated outside India which
proposes to make investment in india in securities.It is used mostly in India to refer to outside
companies investing in the financial markets of India.They should must register with the Securuties
and Exchange Board of India(SEBI) to participate in the market.They have no interest in the
companies they invest in.

urrent financial instruments available for ‰II investments:-

‘ Securities in primary and secondary markets including shares,debentures and warrents of

companies ,unlisted ,listed or to be listed on a recognized stock exchange in India;
‘ Units of mutual funds;
‘ "ated Government Securities;
‘ "erivatives traded on a recognized stock exchange;
‘ ommercial papers
‘ Security receipts

There is need of ‰II because ‰II flows supplements and augmented domestic savings and domestic
investment without increasing the foreign debt of our country. apital inflows to the equity market

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 increase stock prices ,lower the cost of equity capital and ecourage the investment by Indian
firms.The export group opines that ‰II inflow have some savings like features.

‰II are called good friend for good times as they are volatile in nature.The reasons are the increase in
investment by ‰IIs increase stock indices the stock prices and encourages futher investment. In this
event when any correction takes place the stock prices decline and there will be pull out by the ‰IIs
in a large numbers as earnings per share declines. And the ‰IIs manipulate the situation of boom in
such a manner that they wait till the index rises up to a certain height and exit at an appropriate
time.The tendency increases the volatility futher

‘ ‰"I allows the transfer of technology²particularly in the form of new varieties of capital
inputs²that cannot be achieved through financial investments or trade in goods and services. ‰"I
can also promote competition in the domestic input market.
‘ Recipients of ‰"I often gain employee training in the course of operating the new businesses,
which contributes to human capital development in the host country.
‘ Profits generated by ‰"I contribute to corporate tax revenues in the host country.

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 '% !+

‰I" basically means investment by a foreign company for purchase of land ,equipment ,buildings etc
in another country.It also refers to the purchase o controlling interest in existing operations and
businesses.It could be through mergers and acquisitions.It helps MNs keep production cost down
by accessing low-wage labor pools in developing countries.As for developing nations,such
investments help them access technology and ensure jobs for its umemployed population.

‰"I is thought to be more useful to a country than investment in the equity of its companies because
equity investments are potentially ³hot money´ which can leave at the first sign of trouble,whereas
‰"I isdurable and generally useful whether things go well or badly.‰"I isprohibited in the sectors
like Retail trade,Gambling,Atomic energy and betting&lottery.

Entry Options:-
‘ Incorporate Entity
‘ Branch office
‘ Liasion office
‘ Project office

""'  +%

‘ Economic development of the country ‘ National Secreacy is hampared

‘ Transfer of technology ‘ "isadvantages for petty investors
‘ reates employment ‘ Ëigh travel and communication expense
‘ Opens window for export ‘ "ifference in work culture
‘ Risk of losing ownership to an overseas company

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Import barriers Export

Are transportation costs high?

Is know-how easy to license ‰"I

‰"I
Tight control over foreign ops required
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‰"I
 Is know-how valuable and is
protection possible
 License

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It is most important to understand distinction between these two.

‘ When ‰"I comes in the country then it is essentially in the form of long term investment
which will not only bring funds but create job opportunity too. Whereas when ‰II brings fund
in the country, it is essentially for short term and primarily invested in capital markets but
will not lead to any other economic activity like job creation, etc.
‘ Entry and exit is relatively very easy for an ‰II as compared to ‰"I. Entry difficult for ‰"I
becauser of infrastructure problems .Exit more difficult because of archaic labor laws.
‘ ‰II have been blamed for exacerbating small ecomonic problems in a country by making
large and concentrated withdrawals at the first sign og economic weakness.
‘ ‰"I is more desirable than portfolio investment because the investment there under are made
directly in the capital of the company and not in the secondary market.
‘ ‰II investment is frequently referred to as hot money for the reason that it can leave the
country at the same speed at which it comes in,in case of ‰"I it doesn¶t.

It is clear from this as to which mode of fund flow is intended and why. Ëowever, some
believe capital markets are indications of how good or well the development is happening in
the country.







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