instruments of international money market
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8/2/2019 Instruments of International Money Market
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Market for short term financing
Investment instruments that are traded or
issued internationally.
Core of this market is euro currency
market.
Introduction
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Reconcile the cash needs of deficitunits with needs of surplus units.
High degree of safety ofprincipal
No central location
Features Of International
Money Market
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Banker’s acceptanceand
Letter of credit
Euro currencytime deposits and
certificate of deposits
Euro notes and eurocommercial papers
Medium term notesand deposit notes
Floating ratenotes
INSTRUMENTS
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Banker’s acceptance arise from international
trade.
International trade transactions are financed by
banks.
Obligation by a specific bank to pay a certain
amount on a certain date in the future.
Banker’s Acceptance
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Legal commitment on the part of the bank
in which the bank promises the exporter topay on behalf of the importer upon
presentation of documents conveying title
of the goods.
Letter of credit
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Non – negotiable time deposit
Cancelling a time deposit is expensive, so investor
sacrifices liquidity.Those who want greater liquidity, invest in shorter
liquidity.
Eurocurrency certificate of
deposits
It is a time deposit that is transferable.
Eurocurrency time deposits
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Short term instruments
Unsecured promissory notes issued by corporations
and banks.
Euro notes encompasses note issuance facilities. It
can be:
Euro Notes and Euro
Commercial Papers
• With the support of a medium termcommitment by a group of banks toprovide funds.
Underwritten
• Without the support of a mediumterm commitment by a group of
banks to provide funds.
Non -Underwritten
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Issued by international banks.
Fixed rate corporate bonds but of generally shorter
maturityRegarded by institutional investor as a temporary
investment that can be designed to suit particularinvestor’s requirements.
MTN financing is often described as “InvestorDriven.”
Problem with MTNs is lack of liquidity.
Yield calculated in the same way as bond yield.
Medium Term Notes
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Instrument was introduced in early 1970’s.
Interest rate floats.
Pays a three or six month’s interest rate set ABOVE, AT or
BELOW LIBOR (London inter bank offered rate). Interest rate set every 3 or six months to a new level based on
prevailing LIBOR level at the reset date.
LIBOR – It is the average interest rate which the leading
banks in London charge when lending to other banks. It is abenchmark for finance all over the world.
Floating Rate Notes
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Reference rate Margin
Coupon paymentfrequency
Reference rateperiod
Maturity
Features of FRNs