Session 1 - Lecture Notes
Session 1 - Lecture Notes
USA, Eurozone, G20, PIGS, BRIC, Emerging Markets, Frontier Markets
Products: FX, Money Markets, Fixed Income, Equities, Derivatives, Commodities,
Credit
Market Types: Over-The-Counter (OTC) Exchanges – Stocks, Financial &
Commodity Futures
Supra-National Institutions
Regulators: Central Bank, SEC
IMF, World Bank, FATF
Market Evolution in the 21st century
The Positives:
- Overall, stock markets have gone up – wealth
has increased
- Trade has increased many fold – FX flows
have skyrocketed
- Technology has made it easier to be involved
in the Financial Markets – trade from home
- Oil prices have dropped
- World-wide inflation has dropped
The Not-So-Positives:
- 9/11 and the related market set-backs
- 2008 Sub-Prime Crisis and the Greek problem
- Slowdown in financial innovation - derivatives
- Need for Governments &Financial Institutions
to fight against Money Laundering & Terrorist
Financing
- FATF Strengthening & Wolfsberg Standards
- Strengthening of Compliance & Higher Capital
Requirements – business impact
Recommended Reading:
A Random Walk Down Wall Street,
Burton Malkiel
Session 1
Products & Paarticipants
Money Markets
What constitutes Money Markets?
Ø Money: Cash & Current Account Deposits
Ø Near-Money: Under 1 Year - Term Deposits
& T-bills
Market Participants:
Ø Commercial Banks collect Demand & Time
Deposits and used Money Markets to:
o Maintain Required Liquidity (CRR, SLR)
o Invest excess liquidity at the highest
possible return
o Borrow funds at the lowest possible
cost
Ø Central Banks/Treasury regulate the
country’s monetary system
o Print Money
o Regulate Money Markets
o Manage Monetary Policy through OMO
in the Money Markets
o Ensure Price Stability - Manage Inflation
o Produce real economic growth
o Manage External BoP
o Keep the nation at full employment
o Manage the national currency’s parity
Ø Central Bank’s Open Market Operations
o Buy & Sell MM Instruments
o Purchase & Sale of foreign currency
against local currency
o Changing the borrowing cost for banks
– Policy Rate
o Changing Reserve Requirements for
banks to manage available liquidity
o Issuing other specific regulations on the
rate & asset type banks are allowed to
hold
Other Market Participants:
Ø Non-Bank Financial Institutions
Ø Non-Financial Institutions (Corporations)
Ø Not-For-Profit Companies
Ø Individuals: Checking & Saving Accounts, T-
bills, Transaction Pmts
Foreign Exchange Markets:
Ø Onshore Dollar Market: US Domestic
Market
Ø Off-shore Dollar Market: Euro-dollar Market
o After WW2, Dollar Reserves of Eastern
Bloc were moved to London and not the
USA due to mistrust – Euro-dollars
Ø Asian Dollar Market: South East Asian
Market
Ø Off-shore markets are less tightly regulated,
and can offer higher yields on deposits.
Ø Euro-markets exist for all major currencies
and the main centers are:
o London, Tokyo, Singapore, Nassau &
Bahrain because of:
§ No restrictions on inflows and
outflows
§ No regulation affecting cost of euro-
currency deposits
Main Participants in FX Markets are:
Ø Commercial Banks – Trade, FX Trading
Ø Corporations- Trade
Ø Central Banks- Currency Management
Recommended Reading:
Chapter 1
Foreign Exchange & Money Markets (FE&MM)
Heinz Riehl & Rita M. Rodriguez