MONEY MARKETSMONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSRPROF. NAVEEN BHATIA -NLDIMSR

MONEY MARKETSMONEY MARKETSPROF. NAVEEN BHATIAPROF. NAVEEN BHATIA

NLDIMSRNLDIMSR

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY MARKETSMONEY MARKETS► THE NEED FOR MONEY MARKETS ARISES BECAUSE THE IMMEDIATE THE NEED FOR MONEY MARKETS ARISES BECAUSE THE IMMEDIATE

CASH NEEDS OF INDIVIDUALS,CORPORATIONS, GOVERNMENT DON’T CASH NEEDS OF INDIVIDUALS,CORPORATIONS, GOVERNMENT DON’T NECESSARILY COINCIDE WITH THEIR RECEIPTS OF CASH.NECESSARILY COINCIDE WITH THEIR RECEIPTS OF CASH.

► A MONEY MARKET INSTRUMENT PROVIDES AN INVESTMENT A MONEY MARKET INSTRUMENT PROVIDES AN INVESTMENT OPPORTUNITY THAT GENERATES A HIGHER RATE OF INTEREST THAN OPPORTUNITY THAT GENERATES A HIGHER RATE OF INTEREST THAN HOLDING CASH.HOLDING CASH.

► IMPORTANT FEATURES OF MONEY MARKET INSTRUMENTS:IMPORTANT FEATURES OF MONEY MARKET INSTRUMENTS:

► LARGE DONIMNATION - PRIMARILY INSTITUTIONAL MARKETLARGE DONIMNATION - PRIMARILY INSTITUTIONAL MARKET► LOW DEFAULT RISK? MM INSTRUMENTS ARE ENERALLY ISSUED BY LOW DEFAULT RISK? MM INSTRUMENTS ARE ENERALLY ISSUED BY

HIGH QUALITY BORROWERS WITH LOW DEFAULT RISK.HIGH QUALITY BORROWERS WITH LOW DEFAULT RISK.► BECAUSE OF MATURITY BEING LESS THAN A YR THEY HAVE LOW BECAUSE OF MATURITY BEING LESS THAN A YR THEY HAVE LOW

INTEREST RATE RISK.INTEREST RATE RISK.

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY MARKETSMONEY MARKETS► TREASURY BILLSTREASURY BILLS::► SHORT TERM OBLIGTIONS OF THE GOVT TO FUND CURRENT BUDGET SHORT TERM OBLIGTIONS OF THE GOVT TO FUND CURRENT BUDGET

SHORTFALL & TO REFINANCE MATURING GOVT. DEBT.SHORTFALL & TO REFINANCE MATURING GOVT. DEBT.► NEW ISSUES THROUGH AUCTIONSNEW ISSUES THROUGH AUCTIONS► BIDS MAY BE SUBMITTED BY PDS, BANKS ETC.BIDS MAY BE SUBMITTED BY PDS, BANKS ETC.► IN US THE BUILLS ARE ISUED FOR 91 DAYS(13 WEEKS), 182 DAYS( 26 WEEKS) IN US THE BUILLS ARE ISUED FOR 91 DAYS(13 WEEKS), 182 DAYS( 26 WEEKS)

AND 52 WEEKS.AND 52 WEEKS.► THERY ARE ISSUED AT A DISCOUNT TO THEIR FV. EG 98.678% OF THE FV.THERY ARE ISSUED AT A DISCOUNT TO THEIR FV. EG 98.678% OF THE FV.► THE SECONDARY MARKET TRANSACTION BETWEEN FIS IS THROUGH FED(RBITHE SECONDARY MARKET TRANSACTION BETWEEN FIS IS THROUGH FED(RBI

)- FED BOOK ENTRY SYSTEM)- FED BOOK ENTRY SYSTEM

JPM SELLS 50MN$T-BILLS

LEHMAN BROS.BUYS 50MN$

FED TRANSFER50MN T-BILLS

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY AMRKETSMONEY AMRKETS

► TREASURY BILL YIELDS:TREASURY BILL YIELDS:► SOLD AT A DISCOUNT. THE RETURNS COMES FROM THE PURCHASE SOLD AT A DISCOUNT. THE RETURNS COMES FROM THE PURCHASE

PRICE PAID AND FACE VALUE RECEIVED ON MATURITY.PRICE PAID AND FACE VALUE RECEIVED ON MATURITY.► DISCOUNT YIELDDISCOUNT YIELD( 10000-9650)/10000*{360/182)= 6.92%( 10000-9650)/10000*{360/182)= 6.92%► THE DISCOUNT YIELD IS DIFFERENT FROM TRUE YIELD. THE BOND THE DISCOUNT YIELD IS DIFFERENT FROM TRUE YIELD. THE BOND

EQUIVALENT YIELD = {10000-9650}/{9650*[365/182]= 7.27%EQUIVALENT YIELD = {10000-9650}/{9650*[365/182]= 7.27%► IF THE DISCOUNT YIELD IS GIVEN THE PRICE OF THE T-BILL CAN BE IF THE DISCOUNT YIELD IS GIVEN THE PRICE OF THE T-BILL CAN BE

CALCULATED. P0= PF-(DY XH/360 XPF)CALCULATED. P0= PF-(DY XH/360 XPF)► THE BID (DY) AND ASK(DY): THE BID DY IS THE YIELD AT WHICH THE THE BID (DY) AND ASK(DY): THE BID DY IS THE YIELD AT WHICH THE

PD WILL BUY AND ASK IS THE DY AT WHICH IT WILL SELL. THE PD WILL BUY AND ASK IS THE DY AT WHICH IT WILL SELL. THE DIFFERENCE IS KNOWN AS THE SPREAD WHICH IS THE PROFIT FOR DIFFERENCE IS KNOWN AS THE SPREAD WHICH IS THE PROFIT FOR THE DEALERS.THE DEALERS.

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY AMRKETSMONEY AMRKETS

► FEDERAL FUNDS : (CALL MONEY)FEDERAL FUNDS : (CALL MONEY)► SHORT TERM FUNDS TRANSFERERED BETWEEN FIs USUALLY FOR A SHORT TERM FUNDS TRANSFERERED BETWEEN FIs USUALLY FOR A

PERIOD OF ONE DAY.(MAXIMUM UPTO 15 DAYS)PERIOD OF ONE DAY.(MAXIMUM UPTO 15 DAYS)► THEY ARE SHORT-TERM (OVERNIGHT) UNSECURED LOANS.THE RATE THEY ARE SHORT-TERM (OVERNIGHT) UNSECURED LOANS.THE RATE

ASSUME S A 360 DAYS. TO CONVERT INTO BOND EQUIVALENT THE ASSUME S A 360 DAYS. TO CONVERT INTO BOND EQUIVALENT THE RATE WILL BE QUOTED RATE X365/360.RATE WILL BE QUOTED RATE X365/360.

► COMMERCIAL BANKS CONDUCT THE VAST MAJORITY OF COMMERCIAL BANKS CONDUCT THE VAST MAJORITY OF TRANSACTIONS. BANKS WITH EXCESS RESERVES LEND FED FUNDS TRANSACTIONS. BANKS WITH EXCESS RESERVES LEND FED FUNDS WHILE BANKS WITH DEFICIENT FUNDS BORROW FED FUNDS.WHILE BANKS WITH DEFICIENT FUNDS BORROW FED FUNDS.

► USUALLY TRANSACTIONS ARE THRU PHONE. ALTERNATIVELY USUALLY TRANSACTIONS ARE THRU PHONE. ALTERNATIVELY TRANSACTIONS CAN BE THROUGH BROKERS FOR A SDMALL FEE.TRANSACTIONS CAN BE THROUGH BROKERS FOR A SDMALL FEE.

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY AMRKETSMONEY AMRKETS

► REPURCHASE AGREEMENTS:REPURCHASE AGREEMENTS:► AN AGREEMENT INVOLVING SALE OF SECURITIES BY ONE PARTY TO AN AGREEMENT INVOLVING SALE OF SECURITIES BY ONE PARTY TO

ANOTHER WITH A PROMISE TO REPURCHASE THE SECURITIES AT A ANOTHER WITH A PROMISE TO REPURCHASE THE SECURITIES AT A SPECIFIED PRICE AND ON A SPECIFIED DATE.SPECIFIED PRICE AND ON A SPECIFIED DATE.

► THE COLLATERAL OR SECURITIES USED ARE TREASURY SECURITIES THE COLLATERAL OR SECURITIES USED ARE TREASURY SECURITIES AND IN US ALSO FANNIE MAE.AND IN US ALSO FANNIE MAE.

► A REPO FOR ONE PARTY IS A REVERSE REPO FOR THE CP.A REPO FOR ONE PARTY IS A REVERSE REPO FOR THE CP.► A GIVEN TRANSACTION IS A REPO FOR SECURITY SELLER AND A A GIVEN TRANSACTION IS A REPO FOR SECURITY SELLER AND A

RVERSE REPO FOR A SECURITY BUYER.RVERSE REPO FOR A SECURITY BUYER.► MOST OF THE REPOS HAVE A SHORT TERM (1-14 DAYS). HOWEVR, MOST OF THE REPOS HAVE A SHORT TERM (1-14 DAYS). HOWEVR,

THERE IS A GROWING MARKET FOR 1-3M REPOS.THERE IS A GROWING MARKET FOR 1-3M REPOS.► THE DIAGRAM ON THE NEXT SLIDE SHOWS A TYPICAL REPO THE DIAGRAM ON THE NEXT SLIDE SHOWS A TYPICAL REPO

TRANSACTIONTRANSACTION

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY AMRKETSMONEY AMRKETS

► REPURCHASE AGREEMENTS:REPURCHASE AGREEMENTS:

HDFC BANKBUYS A 100 CR REPO

SBI SELLS A 100 CRREPO

TODAY -100 CR FROMRESERVE ACCOUNT OF

HDFC.+100 CR IN T-BONAC OF HDFC

TODAY +100CR IN RESERVEAC

-100CR T-BONDAC

NEXT DAY: +100 CR+1 DAYINTERST IN RESERVE

-100 CR IN T-BOND AC

NEXT DAY-100CR+INT RESERVE AC

+100 CR IN TBOND AC

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY MARKETSMONEY MARKETS► REPO YIELDS:REPO YIELDS:► TREASURY SECURITIES BACK REPO AGREEMENT, THEY ARE LOW TREASURY SECURITIES BACK REPO AGREEMENT, THEY ARE LOW

CREDIT RISK REINVESTMENTS AND HAVE SLIGHTLY LOWER INTEREST CREDIT RISK REINVESTMENTS AND HAVE SLIGHTLY LOWER INTEREST RATES THAN UNCOLLATERISED FED FUNDS.RATES THAN UNCOLLATERISED FED FUNDS.

► YIELD= [PF-PO/PO]*[360/H]YIELD= [PF-PO/PO]*[360/H]► THE FED USUUALLY COMBINES FED FUNDS AND REPO FUNDS.THE FED USUUALLY COMBINES FED FUNDS AND REPO FUNDS.► REPO ARE LESS LIQUID AND NON-BANKS ARE MORE FREQUENT REPO ARE LESS LIQUID AND NON-BANKS ARE MORE FREQUENT

USERS OF REPOS.USERS OF REPOS.► THE COLLATERAL MAY BE SLIGHTLY HIGHER THAN THE AMOUNT THE COLLATERAL MAY BE SLIGHTLY HIGHER THAN THE AMOUNT

BORROWED TO TAKE CAARE OF ANY FALL IN THE VALUE DUE TO BORROWED TO TAKE CAARE OF ANY FALL IN THE VALUE DUE TO INCREASE IN THE INTEREST RATES DURING THE REPO PERIOD.INCREASE IN THE INTEREST RATES DURING THE REPO PERIOD.

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY MARKETSMONEY MARKETS► COMMERCIAL PAPERS:COMMERCIAL PAPERS:► UNSECURED PROMISORY NOTE ISSUED BY CORPORATES FOR SHORT-TERM UNSECURED PROMISORY NOTE ISSUED BY CORPORATES FOR SHORT-TERM

FUNDING REQUIREMENTS.FUNDING REQUIREMENTS.► USUALLY PERMITTED TO COMPANIES WITH STRONG CREDIT RATINGS.THE RATE USUALLY PERMITTED TO COMPANIES WITH STRONG CREDIT RATINGS.THE RATE

PAID IS LOWER THAN THE NORMAL PLR PAID TO THE BANKS FOR OTHER WC.PAID IS LOWER THAN THE NORMAL PLR PAID TO THE BANKS FOR OTHER WC.► THERE IS NOT A VERY STRONG SECONDARY MARKET FOR CPS AS THE THERE IS NOT A VERY STRONG SECONDARY MARKET FOR CPS AS THE

UNDERWRITER WILL GENERALLY BUYBACK SHOULD A BUYER WISHES TO SELL IT.UNDERWRITER WILL GENERALLY BUYBACK SHOULD A BUYER WISHES TO SELL IT.► THE INTEREST RATE PAID ON THE CP USUALLY DEPENDS UPON THE CRDIT RATING.THE INTEREST RATE PAID ON THE CP USUALLY DEPENDS UPON THE CRDIT RATING.► IN THE US THE COS WITH LOWER THAN PRIME CREDIT RATING USUALLY BACK CPS IN THE US THE COS WITH LOWER THAN PRIME CREDIT RATING USUALLY BACK CPS

WITH A LINE OF CREDIT OBTAINED FROM THE BANK.WITH A LINE OF CREDIT OBTAINED FROM THE BANK.► CPS MAY BE SOLD DIRECTLY OR THROUGH AN INVESTMENT BANK WHO CPS MAY BE SOLD DIRECTLY OR THROUGH AN INVESTMENT BANK WHO

DETERMINES THSE DISCOUNT AFTER TALKING TO THE PROSPECTIVE BUYERS.DETERMINES THSE DISCOUNT AFTER TALKING TO THE PROSPECTIVE BUYERS.► THEY ARE QUOTED ON A DISCOUNT BASIS. I(CP)= [PF-P0]/PF X[360/H]THEY ARE QUOTED ON A DISCOUNT BASIS. I(CP)= [PF-P0]/PF X[360/H]► WHEN CONVERTED TO A BOND EQUIVALENT YIELD 360 BECOMES 365AND P0 WHEN CONVERTED TO A BOND EQUIVALENT YIELD 360 BECOMES 365AND P0

COMES IN THE DENOMINATORCOMES IN THE DENOMINATOR

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY MARKETSMONEY MARKETS► CERTIFICATE OF DEPOSITS:CERTIFICATE OF DEPOSITS:

► IS A BANK ISSUED TIME DEPOSIT THAT SPECIFIES AN INTEREST RATE AND IS A BANK ISSUED TIME DEPOSIT THAT SPECIFIES AN INTEREST RATE AND MATURITY DATE AND IS SALABLE IN THE SECONDARY MARKET.MATURITY DATE AND IS SALABLE IN THE SECONDARY MARKET.

► A NEGOTIABLE CD IS A BEARER INSTRUMENT-WHOEVER HOLDS THE CD WHEN A NEGOTIABLE CD IS A BEARER INSTRUMENT-WHOEVER HOLDS THE CD WHEN IT MATURES RECEIVES THE PRINCIPAL 7 INTEREST.IT MATURES RECEIVES THE PRINCIPAL 7 INTEREST.

► IN US THE NEGITIABLE FORM COMMENCED ONLY IN 1960S.IN US THE NEGITIABLE FORM COMMENCED ONLY IN 1960S.► USUALLY ISSUED FOR A PERIOD OF 1-2-3-6 MONTHS.USUALLY ISSUED FOR A PERIOD OF 1-2-3-6 MONTHS.► THE YIELDS ON THE CDS ARE USUALLY NEGOTIATED BETWEEN THEBANK AND THE YIELDS ON THE CDS ARE USUALLY NEGOTIATED BETWEEN THEBANK AND

THE BUYER.THE BUYER.► FOR EXAMPLE IF INTEREST RATE IS 7% ANNUAL FOR 6 MONTHS A CD HOLDER FOR EXAMPLE IF INTEREST RATE IS 7% ANNUAL FOR 6 MONTHS A CD HOLDER

WILL RECEIVE FV= (1000000*(1+3.5%)= 10,35,000.WILL RECEIVE FV= (1000000*(1+3.5%)= 10,35,000.

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY MARKETSMONEY MARKETS► BANKER’S ACCEPTANCEBANKER’S ACCEPTANCE

5. TIME DRAFT & SHIPPING PAPAERS SENT TO FOREIGN BANK BY EXP5. TIME DRAFT & SHIPPING PAPAERS SENT TO FOREIGN BANK BY EXP6. TIME DRAFT AND SHIPPING PAPERS SENT TO INDIAN BANK FOR BANKER ACC6. TIME DRAFT AND SHIPPING PAPERS SENT TO INDIAN BANK FOR BANKER ACC7. PAYMENTS SENT TO FOREIGN BANK7. PAYMENTS SENT TO FOREIGN BANK8. PAYMENT SENT TO FOREIGN BROKER.8. PAYMENT SENT TO FOREIGN BROKER.9. PAYMENT TO INDIAN BANK9. PAYMENT TO INDIAN BANK10. SHIPPING PAPAERS DELIVERED.10. SHIPPING PAPAERS DELIVERED.

DOMESTIC IMPORTER FOREIGN EXPORTER

INDIAN BANK FOREIGN BANK

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY MARKETSMONEY MARKETS► MONEY MARKET PARETICIPANTSMONEY MARKET PARETICIPANTS► INSTRUMENT ISSUER INVESTORSINSTRUMENT ISSUER INVESTORS T-BILLS GOI BANKS, PD ,FIs, CORPT-BILLS GOI BANKS, PD ,FIs, CORP

FED FUNDS BANKS BANKSFED FUNDS BANKS BANKS

REPO CENT BANK BANK,CENTBANKREPO CENT BANK BANK,CENTBANK BANK,PDS,FIs PDs;FIs,CORPBANK,PDS,FIs PDs;FIs,CORP CPS BANKS,FIs,CORP CORPNSCPS BANKS,FIs,CORP CORPNS

CDS BANKS CORP;FIs CDS BANKS CORP;FIs

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY MARKETSMONEY MARKETS► T-BIILS: TAX RECEIPTS ARE GENERALLY CONCENTERATED AROUND T-BIILS: TAX RECEIPTS ARE GENERALLY CONCENTERATED AROUND

QUARTERLY DATES, GOVT. EXPENDITURES ARE MORE EVENLY QUARTERLY DATES, GOVT. EXPENDITURES ARE MORE EVENLY DISTRIBUTED.DISTRIBUTED.

► THE CENTRAL BANK HOLDS T-BILLS AND T-BONDS TO CONDUCT THE CENTRAL BANK HOLDS T-BILLS AND T-BONDS TO CONDUCT OMOS.OMOS.

IT PURCHASES T-BILLS WHEN IT WANTS TO INCREASE MONEY SUPPLYIT PURCHASES T-BILLS WHEN IT WANTS TO INCREASE MONEY SUPPLY► THE CENTRAL BANK OFTEN USES REPOS AND REVERSE REPOS WHEN THE CENTRAL BANK OFTEN USES REPOS AND REVERSE REPOS WHEN

IT WANTS TO SMOOTH INTEREST RATES AND MONEY SUPPLY.IT WANTS TO SMOOTH INTEREST RATES AND MONEY SUPPLY.► FED TARGETS THE FED RATE (BANK RATE), WHICH IN TURN AFFECTS FED TARGETS THE FED RATE (BANK RATE), WHICH IN TURN AFFECTS

THE OTHER MONEY MARKET RATES.THE OTHER MONEY MARKET RATES.► FOR THE FINANCIAL INSTITUTIONS , BECAUSE THE LIABILITY FOR THE FINANCIAL INSTITUTIONS , BECAUSE THE LIABILITY

PAYMENTS ARE UNPREDICTABLE, THEY MAINTAIN LIQUID ASSETSPAYMENTS ARE UNPREDICTABLE, THEY MAINTAIN LIQUID ASSETS► MONEY MARKET MUTUAL FUNDS BY THEIR VERY NATURE INVEST MONEY MARKET MUTUAL FUNDS BY THEIR VERY NATURE INVEST

LARGE AMOUNT IN MONEY AMRKET INSTRUMENTS.LARGE AMOUNT IN MONEY AMRKET INSTRUMENTS.

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY MARKETSMONEY MARKETS► EURO MONEY MARKETS:EURO MONEY MARKETS:► MANY INTERNATIONAL CONTRACTS CALL FOR PAYMENT IN US $.MANY INTERNATIONAL CONTRACTS CALL FOR PAYMENT IN US $.► AS A RESULT FOREIGN GOVT. AND BUSINESS HAVE HISTORICALLY AS A RESULT FOREIGN GOVT. AND BUSINESS HAVE HISTORICALLY

HELD A STORE OF FUNDS DENOMINATED IN $ OUTSIDE US.HELD A STORE OF FUNDS DENOMINATED IN $ OUTSIDE US.► THESE DOLLAR DENOMINATED DEPOSITS HELD OFFSHORE IN US THESE DOLLAR DENOMINATED DEPOSITS HELD OFFSHORE IN US

BANK BRANCHES AND OTHER BANKS ARE CALLED EURODOLLAR BANK BRANCHES AND OTHER BANKS ARE CALLED EURODOLLAR DEPOSITS.DEPOSITS.

► THE IMPORTANT FEATURES OF THESE DEPOSITS IS 5THEY ARE NOT THE IMPORTANT FEATURES OF THESE DEPOSITS IS 5THEY ARE NOT SUBJECT TO US BANK REGULATIONS SUCH AS RESERVE RQMTS AND SUBJECT TO US BANK REGULATIONS SUCH AS RESERVE RQMTS AND DEPOSIT INSURANCE PREMIUMS.DEPOSIT INSURANCE PREMIUMS.

► EURODOLLAR CERTIFICATE OF DEPOSIT:EURODOLLAR CERTIFICATE OF DEPOSIT:► MATURITY ONE WEEK TO 6 MONTHSMATURITY ONE WEEK TO 6 MONTHS► THE INTEREST RATE IS NOW ALMOST SIMILAR TO US CDTHE INTEREST RATE IS NOW ALMOST SIMILAR TO US CD► SIMILARILY THERE ARE EURONOTES AND COMMERCIAL PAPERSSIMILARILY THERE ARE EURONOTES AND COMMERCIAL PAPERS

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY MARKETSMONEY MARKETS► EURO MONEY MARKETS:( BACKGROUND)EURO MONEY MARKETS:( BACKGROUND)► US GOVT. HAD IMPOSED AN INTEREST EQUALISATION TAX TO US GOVT. HAD IMPOSED AN INTEREST EQUALISATION TAX TO

REDUCE THE POPULARITY OF SECURITIES ISSUED BY EUROPEANS TO REDUCE THE POPULARITY OF SECURITIES ISSUED BY EUROPEANS TO AMERICAN INVESTORS.AMERICAN INVESTORS.

► US GOVT. HAD ADOPTED TO THIS MEASURE AS IT WAS FACING A US GOVT. HAD ADOPTED TO THIS MEASURE AS IT WAS FACING A CONTINUOUS BOP PROBLEM.CONTINUOUS BOP PROBLEM.

► BECAUSE OF THIS THE YANKEE BOND MARKET DRIED UP.BECAUSE OF THIS THE YANKEE BOND MARKET DRIED UP.► EURODOLLAR BONDS WAS A WAY OUT , AS THESE BONDS ARE NOT EURODOLLAR BONDS WAS A WAY OUT , AS THESE BONDS ARE NOT

SOLD TO THE AMERICAN INVESTORS.SOLD TO THE AMERICAN INVESTORS.► THE US DOLLAR IS ONE OF THE CURRENCIES USED IN THE EURO THE US DOLLAR IS ONE OF THE CURRENCIES USED IN THE EURO

MARKETMARKET► IT IS ALSO POSSIBLE TO ISSUE EUROYEN; EUROKIWIS AND SO ON.IT IS ALSO POSSIBLE TO ISSUE EUROYEN; EUROKIWIS AND SO ON.► SINCE 1999 , EURO HAS COME INTO SCENE. SO ANY NATION PART OF SINCE 1999 , EURO HAS COME INTO SCENE. SO ANY NATION PART OF

EURO AND ISUING EUROS EURO IS LOKE ISUING A DOMESTIC DEBT.EURO AND ISUING EUROS EURO IS LOKE ISUING A DOMESTIC DEBT.

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY MARKETSMONEY MARKETS► EURO MONEY MARKETS:( BACKGROUND)EURO MONEY MARKETS:( BACKGROUND)► A BORROWER’S DECISION TO ISSUE BONDS IN A PARTICULAR A BORROWER’S DECISION TO ISSUE BONDS IN A PARTICULAR

CURRENCY DOESN’T MEAN THAT THE BORROWER REQUIRES THAT CURRENCY DOESN’T MEAN THAT THE BORROWER REQUIRES THAT CURENCY . THE BORROWER ACTUALLY LOOKS AT THE INTEREST CURENCY . THE BORROWER ACTUALLY LOOKS AT THE INTEREST RATE THAT IS MORE FAVOURABLE AND THEN GETS THE DESIRED RATE THAT IS MORE FAVOURABLE AND THEN GETS THE DESIRED CURRENCY THROUGH THE FOREX MARKETS.CURRENCY THROUGH THE FOREX MARKETS.

► THE LARGE SHARE OF ISSUANCE OCCURING IN US DOLLARS IN MOST THE LARGE SHARE OF ISSUANCE OCCURING IN US DOLLARS IN MOST YEARS THEREFORE REFLECT FAVOURABLE DOLLAR INTEREST RATES YEARS THEREFORE REFLECT FAVOURABLE DOLLAR INTEREST RATES AND ALSO A LARGE POOL OF INVESTORS PREFERRING TO PURCHASE AND ALSO A LARGE POOL OF INVESTORS PREFERRING TO PURCHASE DOLLAR-DENOMINATED SECURITIES, RATHER THAN THE ISSUER’S DOLLAR-DENOMINATED SECURITIES, RATHER THAN THE ISSUER’S NEED FOR $.NEED FOR $.

MONEY MARKETS PROF. NAVEEN BHATIA -NLDIMSR

MONEY MARKETSMONEY MARKETS► LONDON INTERBANK OFFER RATES:LONDON INTERBANK OFFER RATES:► LARGE BANKS IN LONDON HAVE AN ORGANISED EURODOLLAR MARKET..LARGE BANKS IN LONDON HAVE AN ORGANISED EURODOLLAR MARKET..► THIS MARKET IS NOW USED BY BANKS AROUND THE WOPRLD AS A SOURCE THIS MARKET IS NOW USED BY BANKS AROUND THE WOPRLD AS A SOURCE

OF OVERNIGHT FUNDING.OF OVERNIGHT FUNDING.► LIBOR AND US FED FUND RATES TEND TO BE VERY CLOSELY RELATED.LIBOR AND US FED FUND RATES TEND TO BE VERY CLOSELY RELATED.► THE FED FUND RATE IS USUALLY LOWER DUE TO LOWER RISK.THE FED FUND RATE IS USUALLY LOWER DUE TO LOWER RISK.