Money Market Instruments in Pakistan
Money Market Instruments in Pakistan
Money Market Instruments in Pakistan
Money Market
The money market exists for the purpose of
issuing and trading of short-term instruments, that is, instruments where the term remaining from the date when trading takes place to the date of maturity, is of a short-term
nature.
INSTRUMENTS IN PAKISTAN!
Treasury Bills
Commercial Papers Repurchase Agreements Bankers acceptance Eurodollar Deposits
Federal Funds
Treasury Bills
T-bills are the Government debt
Features
Issued through bidding process Zero Coupon bonds sold at a discount to their face values Purchased by individuals, institutions and corporate bodies including banks irrespective of their residential status Can be traded freely in the countrys secondary market. Physical delivery could be affected if required
Types of T-Bills
They are issued with the maturities of
12-months (one-year) 6-months (24Weeks) 3-months
(12-Weeks)
Default risk
Liquidity
T-bills are highly liquid instrument of financial market. Securities can be liquidated when ever the holder wants
Minimum denomination
T-bills are trade on the face value of Rs.100 in Pakistan and in denominations of multiples of 100
Suppose you buy a 12 Weeks T-bill at Rs.98 and keep it until maturity having face value of rs.100. Then the discount rate on this bill can be calculated as:
fortnightly auctions.
Primary dealers were appointed.
Auction System
Open Market Operations(OMO)
Auction System
SBP announces the T-Bill auction
Primary dealers submit the bids After the submission deadline, bids will open MOF decides the cut off price. After one or two days of finalizing price, securities are issued.
COMMERCIAL PAPER
Commercial Paper
Short-term, unsecured promissory notes issued by well-known companies carrying high credit rating Used to meet immediate cash needs Funds raised from commercial paper are commonly used for current transactions SBP and SECP started process of creating commercial paper market in Pakistan in 2003
Maturity Period
Between 30 days and one year from the date of subscription
REPURCHASE AGREEMENT
Repurchase Agreement
Repurchase agreements are agreements between a borrower and a lender
Borrower sells securities to the lender with the stipulation that the securities will be repurchased on a specified date and at a fixed price and interest Securities serve as collateral for loan
Active lenders include state and local governments, insurance companies, Large banks, non-financial corporations, and foreign financial institutions
Government securities are the main collateral for most repos
Purpose of Repo
To meet deposit reserve requirements
In order to purchase interest bearing securities Companies lend to avoid losing even a single days interest.
Advantages Of Repo
Repo rate is less than borrowing from a bank Benefit to lenders is that the maturity of the Repo can be precisely tailored to the lender's needs
BANKERS ACCEPTANCE
Bankers Acceptance
Acceptance means a vow to pay a definite amount of money The person who will pay is called as the promissory while the one who will receive is the beneficiary
Bankers Acceptance
If the time draft is formally accepted by a bank then it becomes a bankers acceptance
The maturities of bankers acceptance mostly range from 30 to 180 days
The promissory uses the banks credit worthiness instead of his own
Importer
Importers Bank
Acceptance
Manufacturer
Letter of Credit
Time Draft
Accepted
Discounted
EURODOLLAR DEPOSITS
Eurodollar Deposits
Eurodollars are the deposits of US dollars in banks which are located outside United States. Generally, the "euro" prefix can be used to indicate any currency held in a country where it is not the official currency. The Eurodollar deposits are always moving in the form of loans.
Dealer In Pakistan
Eurodollar Deposits
The chain of Eurocurrency and Eurodollars will remain functioning until they are in demand. Many are held for one month that is the usual time period for the shipment of goods.
There is no central location for the trading of the Eurocurrency deposits.
Eurodollar Deposits
They are volatile and sensitive to fluctuations in interest rates and currency values. Difference of Interest rate Changes in Currency Value Political Risk
Eurodollar Deposits
Daily Cost of Funds derived from Eurodollars:
FEDERAL FUNDS
Federal Funds
Federal funds refer to the overnight borrowings which are undertaken in order to meet the state banks reserve requirements.
The funds are not physically transferred.
Federal Funds
Meet the Legal Reserve Ratio requirement.
Interest rates highly fluctuate daily depending on the volume of funds which are surplus in the market and the volume of fund needed by the market. Borrowers need of funds is fulfilled while the lender earns interest income on his funds.
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