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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


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 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.

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

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 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.

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 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.

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 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.

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 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.

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 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.

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 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.

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 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.

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

 Deficit >>>

 Surplus>>>

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 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

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 A borrower not able to make payment on the
agreed maturity date.

 Managing the credit risk:-


◦ Credit limit.

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 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.

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

 Managing the interest rate risk:-


◦ Monitor and predict interest rates movement.

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 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.

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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

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 Foreign exchange market.

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THANK
YOU…

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