Money Market Instruments In Pakistan

Group Number : 9 Umair Aziz Roll # 47

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.

Characteristics Of Money Market Instruments

Short-term borrowing and lending
Low credit risk High liquidity High volume of lending and borrowing

INSTRUMENTS IN PAKISTAN!
Treasury Bills
Commercial Papers Repurchase Agreements Bankers acceptance Eurodollar Deposits

Federal Funds

Treasury Bills
T-bills are the Government debt

securities that matures in one year

or less from their issue date.
A treasury bill differs from other types of investments in that they do not pay interest in the traditional

way. When an investor wishes to

purchase a treasury bill, he buys it at a discount rate.

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)

Investment Characteristics Of Treasury Bills

T-bills are on the guarantee of government, so they have minimum default risk.

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

How to calculate return on T-Bills?

T-Bills are sold at a discount from their par value

Yield is based on their appreciation in price b/w

time of issue time they mature or are sold by the investor

Bill yield are determined by the discount method;

treats the par value as the investment base uses a 360-day year for simplicity

 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:

How T-Bills are traded in Pakistan?

At start Treasury bills were issued on fixed rate. eg; six months at 6 percent per year In April 1991 Introduce the American-style auction-based system. The role of primary market restrict to

fortnightly auctions.
Primary dealers were appointed.

State Bank of Pakistan use following two methods to trade T-bills.

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.

OPEN MARKET OPERATION

In OMO Government fix the discount rate before the announcing the new securities and can be issued when they need funds. Through OMO Government can sell as well as buy back securities.

Trading T-Bills in OMO is mainly to

control the circulation of money in the market.

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

Issuer Of Commercial Paper

Highly rated companies and financial institutions with minimum equity of Rs. 100 million

Minimum current ratio of 1: 1 and debt/equity ratio of 60: 40.

Minimum credit rating of the issuer shall be A- No overdue loan or defaults

Size And Denomination

Minimum size of the issue of commercial paper shall not be less than Rs.10 million In case of private placement, CP would be denominated in Rs. 100,000 or in multiple thereof In case of offer to general public, CP may be denominated in Rs. 5,000 or in multiples thereof

Mode Of Issue And Discount Rate

In the form of a promissory note Discount to face value is determined by the issuer keeping in view the prevailing T-bill rates, KIBOR and issuers credit rating

Calculation Of Rate Of Return

DRcp = (Par Value Purchase Price) / Par Value x 360 / Days to Maturity

Investor of Commercial Paper

Can be issued by way of Public offer and/or to Scheduled Banks Large Institutions as the issue size is often too high for individual investors

Advantages For Investor

Higher yields than time deposits Safe investment

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

Types Of Repo (In Term of Maturity)

1. Overnight repos 2. Term repos 3. Open repo

Major Borrowers And Lenders

Major borrowers include government bond dealers of Treasuries and federal agency securities, and large banks

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

Repo Interest Income

The difference between the underlying securities current price and repurchase price is the amount of interest paid by the borrower to the lender
RP Interest income = Amount of loan x Current Repo Rate x (Repo Term in days/360 days)

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

Requirements of the Time Draft

Promissory Signature

The word accepted on top of his signatures and

The date on which the amount will be paid.

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

Mechanism of Bankers Acceptance

Importer

Importers Bank

Acceptance

Manufacturer

Mechanism of Bankers Acceptance

Letter of Credit

Time Draft

Accepted

Discounted

Secondary Market for the Bankers Acceptance

The issuing bank can either keep it in his portfolio or sell the bankers acceptance in the money market. It is sold at a discount from the value which will be payable on maturity.

Secondary Market for the Bankers Acceptance

The net proceeds after the sale = The face amount of the acceptance the discount rate (interest rate*days into maturity*face amount) - the banks acceptance commission The combination of these is called the all in rate.

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.

Mechanism of Eurodollar Deposits

Dealer In Pakistan

Gets Shipment Amount in Dollars

Deposited in a Bank Situated in US

Amount in Dollars Transferred to a Bank Situated 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:

Amount to be loaned * interest rate * 1/360

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.

Commercial banks are the principle borrowers

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.

QUESTION & ANSWER

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