Ðåôåðàò: The Global Money Markets and Money Management
Ðåôåðàò: The Global Money Markets and Money Management
Contents
Introduction…………………………………………………………………3
1.
The General
Economic Conditions for the Use of Money. Money and Money
Substitutes………………………………………………..4
2.
The Global Money
Markets. US Money Market……………………9
3.
Money
Management. Cash Management for Finance Managers...17
Conclusion………………………………………………………………….23
Bibliography………………………………………………………………..25
Introduction
The purpose of our abstract is studying the global money markets and
money as versions of the goods. In chapter 1 we cover general economic
conditions for the use of money. The intent of this chapter is to introduce
some of the functions of money. It is essential to understand these functions
since the money markets carries out similar functions. Everybody use money and
it is important to know «how it works».
Chapter 2 covers short-term debt instruments issued by some of the
largest borrowers in the world—the U.S. Treasury and U.S. federal agencies.
U.S. Treasury bills are considered among the safest and most liquid securities
in the money market. Treasury bill yields serve as benchmark short-term
interest rates for markets around the world. Another large borrower of
short-term funds is a corporation using instruments such as commercial paper or
short-term medium term notes. These instruments are the subject of this chapter
too.
Chapter 2 describes short-term floating-rate securities. The term
“floating-rate security” covers several different types of instruments with one
common feature: the security’s coupon rate will vary over the life of the
instrument. Approximately, 10% of publicly traded debt issued worldwide
possesses a floating coupon. Floating-rate securities are the investment of
choice for financial institutions whose funding costs are based on a short-term
floating rate.
The activity of financial institutions in the money market involves an
activity known as asset and liability management. We introduce the fundamental
principles of asset and liability management in chapter 3. An appreciation of
these concepts and tools is essential to an understanding of the functioning of
the global money markets.
Chapter 3 describes why LIBOR is the very important interest rate. This
chapter covers agency securities. These securities are not typically backed by
the full faith and credit of the U.S. government, as is the case with Treasury
bills. However, short-term agency securities are considered safer than other
money market instruments except U.S. Treasury bills. We describe the role of
the Federal National Mortgage Association in U.S. money market. Also we tell
about cash management. So, let’s start…
Chapter
1
The General Economic Conditions for the Use of Money. Money
and Money Substitutes
All of us know
that a word of "money" means. But not everyone knows why money uses.
We shall try to look at money from other point of view in this chapter. First
we shall stop on general economic conditions for the use of money, and then we
shall tell about functions of money and money substitutes.
Where the free
exchange of goods and services is unknown, money is not wanted. In a state of
society in which the division of labor was a purely domestic matter and
production and consumption were consummated within the single household it
would be just as useless as it would be for an isolated man. But even in an
economic order based on division of labor, money would still be unnecessary if
the means of production were socialized, the control of production and the
distribution of the finished product were in the hands of a central body, and
individuals were not allowed to exchange the consumption goods allotted to them
for the consumption goods allotted to others.
The phenomenon of money presupposes an economic order in which production
is based on division of labor and in which private property consists not only
in goods of the first order (consumption
goods), but also in goods of higher orders (production goods). In such a society, there is no systematic
centralized control of production, for this is inconceivable without
centralized disposal over the means of production. Production is
"anarchistic." What is to be produced, and how it is to be produced, is decided in the first place by the
owners of the means of production, who
produce, however, not only for their own needs, but also for the needs of others, and in their valuations take into account,
not only the use-value that they themselves attach to their products,
but also the use-value that these possess in the estimation of the other members of the community. The balancing of
production and consumption takes place in the market, where the
different producers meet to exchange goods
and services by bargaining together. The function of money is to facilitate
the business of the market by acting as a common medium of exchange. [1, p.26]
Indirect exchange becomes more necessary as
division of labor increases and wants become more refined. In the present stage of economic
development, the occasions when direct
exchange is both possible and actually effected have already become very
exceptional. Nevertheless, even nowadays, they sometimes arise. Take, for
instance, the payment of wages in kind, which is a case of direct exchange so
long on the one hand as the employer uses the labor for the immediate
satisfaction of his own needs and does not have to procure through exchange the
goods in which the wages are paid, and so long on the other hand as the
employee consumes the goods he receives and does not sell them. Such payment of
wages in kind is still widely prevalent in
agriculture, although even in this sphere its importance is being continually diminished by the extension of
capitalistic methods of management and the
development of division of labor.
The simple
statement, that money is a commodity whose economic function is to facilitate
the interchange of goods and services, does not satisfy those writers who are interested rather in the accumulation of
material than in the increase of knowledge. Many investigators imagine
that insufficient attention is devoted to the remarkable part played by money
in economic life if it is merely credited with the function of being a medium of exchange; they do not think that due
regard has been paid to the significance of money until they have enumerated
half a dozen further "functions"—as if, in an economic order
founded on the exchange of goods, there could be a more important function than
that of the common medium of exchange. [1, p. 12]
Credit
transactions are in fact nothing but the exchange of present goods against future goods. Frequent reference is made
in English and American writings to a
function of money as a standard of deferred payments. But the original purpose of this expression was not to contrast a
particular function of money with its
ordinary economic function, but merely to simplify discussions about the influence of changes in the value of money upon
the real amount of money debts. It serves
this purpose admirably. But it should be pointed out that its use has led many
writers to deal with the problems connected with the general economic consequences of changes in the value of money
merely from the point of view of modifications
in existing debt relations and to overlook their significance in all other connections.
Particular attention has been devoted, especially
in recent times, to the function of money as a general
medium of payment and the functions of money as a transmitter of value through
time and space may also be directly traced back to its function as medium
of exchange.[1, p. 15] Indirect
exchange divides a single transaction
into two separate parts which are connected merely by the ultimate intention
of the exchangers to acquire consumption goods. Sale and purchase thus
apparently become independent of each other.
When an indirect exchange is transacted with the aid of money, it is not
necessary for the money to change hands physically; a perfectly secure claim to
an equivalent sum, payable on demand, may be transferred instead of the actual
coins. In this by itself there is nothing remarkable or peculiar to money. What
is peculiar, and only to be explained by reference to the special
characteristics of money; is the extraordinary frequency of this way of
completing monetary transactions.
In the first place, money is especially well adapted to constitute the
substance of a generic obligation. Whereas the fungibility of nearly all other
economic goods is more or less circumscribed and is often only a fiction based
on an artificial commercial terminology, that of money is almost unlimited.
Only that of shares and bonds can be compared with it. [1, p.26]
Technically, and in some countries legally as well, the transfer of a
banknote scarcely differs from that of a coin. The similarity of outward
appearance is such that those who are engaged in commercial dealings are
usually unable to distinguish between those objects that actually perform the
function of money and those that are merely employed as substitutes for them.
The businessman does not worry about the economic problems involved in this; he
is only concerned with the commercial and legal characteristics of coins,
notes, checks, and the like. To him, the facts that banknotes are transferable
without documentary evidence, that they circulate like coins in round
denominations, that no fight of recovery lies against their previous holders,
that the law recognizes no difference between them and money as an instrument
of debt settlement, seem good enough reason for including them within the
definition of the term money, and for drawing a fundamental distinction
between them and cash deposits, which can be transferred only by a procedure
that is much more complex technic ally and is also regarded in law as of a
different kind. This is the origin of the popular conception of money by which
everyday life is governed. No doubt it serves the purposes of the bank
official, and it may even be quite useful in the business world at large, but
its introduction into the scientific terminology of economics is most
undesirable.
We may give the name commodity money to that sort of money that is
at the same time a commercial commodity; and the name fiat money to
money that comprises things with a special legal qualification. A third
category may be called credit money, this being that sort of
money which constitutes a claim against any physical or legal person. [1, p.
24]
The decisive characteristic of commodity money is the employment for
monetary purposes of a commodity in the technological sense. For the present
investigation, it is a matter of complete indifference what particular
commodity this is; the important thing is that it is the commodity in question
that constitutes the money, and that the money is merely this commodity. The
case of fiat money is quite different.
And the last, money is not a free good. Those who need money are willing
to pay for it and those who lend money expect to be compensated. The interest
rate is the cost of money. If you put $1,000 in an account in a savings
and loan that pays interest of 5% per year, you will earn $50 interest in one
year. The savings and loan is paying you $50 for the use of your $1,000.
Similarly, if you buy a $1,000 face value bond with a coupon rate of 5%, you
earn $50 interest each year. The issuer is paying $50 interest each year for
the use of your $1, 000. [6, p. 67]
So, the money is not wanted, where the free exchange of goods and
services is unknown. Money would still be unnecessary if the means of
production were socialized, the control of production and the distribution of
the finished product were in the hands of a central body. But it cannot be in a
modern society. The simple statement, that money is a commodity whose economic
function is to facilitate the interchange of goods and services. But money
carries out also other functions. These are function
of money as a general medium of payment,
and the functions of money as a transmitter of value through time and
space. There are 3 categories of money: commodity money, fiat money, credit
money. And the last - money is not a free good.
Chapter 2
The
Global Money Markets. US Money Market
In this chapter the question will be the global money markets as
component of a financial market. Also we shall pay attention to the US money
market.
So, the money market is a market in which the cash requirements of market
participants who are long cash are met along with the requirements of
those that are short cash. [5, p.9] This is identical to any financial
market; the distinguishing factor of the money market is that it provides for
only short-term cash requirements. The market will always, without fail, be
required because the needs of long cash and short cash market participants are
never completely synchronized. The participants in the market are many and
varied, and large numbers of them are both borrowers and lenders at the same
time. They include:
·
the
sovereign authority, including the central government (“Treasury”),
·
as
well as government agencies and the central bank or reserve bank;
·
financial
institutions such as the large integrated investment banks,
·
commercial
banks, mortgage institutions, insurance companies, and
·
finance
companies;
·
corporations
of all types;
·
individual
private investors, such as high net-worth individuals and
·
small
savers;
·
intermediaries
such as money brokers, banking institutions, etc.;
·
infrastructure
of the marketplace, such as derivatives exchanges.
The money market is traditionally defined as the market for financial
assets that have original maturities of one year or less. In essence, it is the
market for short-term debt instruments. Financial assets traded in this market
include such instruments as U.S. Treasury bills, commercial paper, some
medium-term notes, bankers acceptances, federal agency discount paper, most
certificates of deposit, repurchase agreements, floating-rate agreements, and
federal funds. The scope of the money market has expanded in recent years to
include securitized products such mortgage-backed and asset-backed securities with
short average lives. These securities, along with the derivative contracts
associated with them, are the subject of this study.
The workings of the money market are largely invisible to the average
retail investor. The reason is that the money market is the province of
relatively large financial institutions and corporations. Namely, large
borrowers (e.g., U.S. Treasury, agencies, money center banks, etc.) seeking
short-term funding as well as large institutional investors with excess cash
willing to supply funds short-term. Typically, the only contact retail
investors have with the money market is through money market mutual funds,
known as unit trusts in the United Kingdom and Europe.
Money market mutual funds are mutual funds that invest only in money market
instruments. There are three types of money market funds: (1) general money
market funds, which invest in wide variety of short-term debt products; (2)
U.S. government short-term funds, which invest only in U.S. Treasury bills or
U.S. government agencies; and (3) short-term municipal funds. Money market
mutual funds are a popular investment vehicle for retail investors seeking a
safe place to park excess cash. [5, p.20] In Europe, unit trusts are
well-established investment vehicles for retail savers; a number of these
invest in short-term assets and thus are termed money market unit trusts.
Placing funds in a unit trust is an effective means by which smaller investors
can leverage off the market power of larger investors. In the UK money market,
unit trusts typically invest in deposits, with a relatively small share of
funds placed in money market paper such as government bills or certificates of
deposit. Investors can invest in money market funds using one-off sums or save
through a regular savings plan.
A money market exists in virtually every country in the world, and all
such markets exhibit the characteristics we describe in this study to some
extent. For instance, they provide a means by which the conflicting needs of
borrowers and lenders can achieve equilibrium, they act as a conduit for
financing of all maturities between one day and one year, and they can be
accessed by individuals, corporations, and governments alike.
In addition to national domestic markets, there is the international
cross-border market illustrated by the trade in Eurocurrencies[1].
[5, p. 10] Of course, there are distinctions between individual country
markets, and financial market culture will differ. For instance, the prevailing
financial culture in the United States and United Kingdom is based on a
secondary market in tradable financial assets, so we have a developed and
liquid bond and equity market in these economies. While such an arrangement
also exists in virtually all other countries, the culture in certain economies
such as Japan and (to a lesser extent) Germany is based more on banking
relationships, with banks providing a large proportion of corporate finance.
The differences across countries are not touched upon in this study; rather, it
is the similarities in the type of instruments used that is highlighted.
A security is an instrument that represents ownership in an asset or debt
obligation. Securities are classified as either money market securities,
capital market securities, or derivative securities.
Money market securities are short-term indebtedness. By
“short term” we usually imply an original maturity of one year or less. The
most common money market securities are Treasury bills, commercial paper,
negotiable certificates of deposit, and bankers acceptances. [6, p.44]
Treasury bills (T-bills) are short-term
securities issued by the U.S. government; they have original maturities of
either four weeks, three months, or six months. [6, p.44] Unlike other money
market securities, T-bills carry no stated interest rate. Instead, they are
sold on a discounted basis: Investors obtain a
return on their investment by buying these securities for less than their face
value and then receiving the face value at maturity. T-Bills are sold in
$10,000 denominations; that is, the T-Bill has a face value of $10,000.
Commercial paper is a promissory note—a written
promise to pay—issued by a large, creditworthy corporation. These securities
have original maturities ranging from one day to 270 days and usually trade in
units of $100,000. [6, p.45] Most commercial paper is backed by bank lines of
credit, which means that a bank is standing by ready to pay the obligation if
the issuer is unable to. Commercial paper may be either interest – bearing or
sold on a discounted basis.
Certificates of deposit (CDs) are written promises by a bank
to pay a depositor. Nowadays they have original maturities from six months to
three years. [6, p.45] Negotiable certificates of deposit are CDs
issued by large commercial banks that can be bought and sold among investors.
Negotiable CDs typically have original maturities between one month and one
year and are sold in denominations of $100,000 or more. Negotiable certificates
of deposit are sold to investors at their face value and carry a fixed interest
rate. On the maturity date, the investor is repaid the amount borrowed, plus
interest.
Eurodollar certificates of deposit are CDs issued by foreign
branches of U.S. banks, and Yankee certificates of deposit are
CDs issued by foreign banks located in the United States. [6, p.45] Both
Eurodollar CDs and Yankee CDs are denominated in U.S. dollars. In other words,
interest payments and the repayment of principal are both in U.S. dollars.
Bankers’ acceptances are short-term loans, usually to
importers and exporters, made by banks to finance specific transactions. An acceptance
is created when a draft (a promise to pay) is written by a bank’s customer and
the bank “accepts” it, promising to pay. [6, p.46] The bank’s acceptance of the
draft is a promise to pay the face amount of the draft to whoever presents it
for payment. The bank’s customer then uses the draft to finance a transaction,
giving this draft to her supplier in exchange for goods. Since acceptances
arise from specific transactions, they are available in a wide variety of
principal amounts. Typically, bankers’ acceptances have maturities of less than
180 days. Bankers’ acceptances are sold at a discount from their face value,
and the face value is paid at maturity. Since acceptances are backed by both
the issuing bank and the purchaser of goods, the likelihood of default
is very small.
Money market securities are backed solely by the issuer’s ability to pay.
With money market securities, there is no collateral; that is, no
item of value (such as real estate) is designated by the issuer to ensure
repayment. The investor relies primarily on the reputation and repayment
history of the issuer in expecting that he or she will be repaid.
Markets in the United States [6, p.53-57]:
1.
Equity
Markets
In the United States, there are two national stock exchanges: (1) the New
York Stock Exchange (NYSE), commonly called the “Big Board,” and (2) the
American Stock Exchange (AMEX or ASE), also called the “Curb.” National stock
exchanges trade stocks of not only U.S. corporations but also non-U.S. corporations.
2.
Stock
Exchanges
The regional stock exchanges compete with the NYSE for the execution of
smaller trades.
3.
OTC
Market
The OTC market is called the market for unlisted stocks. As explained
previously, technically while there are listing requirements for exchanges,
there are also listing requirements for the Nasdaq National and Small
Capitalization OTC markets. There are three parts to the OTC market: two under
the aegis of NASD (the Nasdaq markets) and a third market for truly unlisted
stocks, the non-Nasdaq OTC markets.
4.
Stock
Market Indicators
The most commonly quoted stock market indicator is the Dow Jones
Industrial Average (DJIA). Other stock market indicators cited in the financial
press are the Standard & Poor’s 500 Composite (S&P 500), the New York
Stock Exchange Composite Index (NYSE Composite), the Nasdaq Composite Index,
and the Value Line Composite Average (VLCA).
5.
Bond
Markets
The bond trading that does take place on exchanges consists primarily of
small orders, whereas bond trading in the OTC market is for larger—sometimes
huge—blocks of bonds, purchased by institutional investors. The three
broad-based bond market indexes most commonly used by institutional investors
are the Lehman Brothers U.S. Aggregate Index, the Salomon Smith Barney (SSB)
Broad Investment- Grade Bond Index (BIG), and the Merrill Lynch Domestic Market
Index.
6.
Options
and Futures Markets
The first formal options market was the Chicago Board Options
Exchange (CBOE). Soon after, several exchanges introduced options
contracts to their “product lines.” Now options are traded on such
exchanges as the CBOE, the Chicago Board of Trade (CBOT), the Pacific
Stock Exchange, the Philadelphia Stock Exchange, and the American
Stock Exchange.
7.
Money
Markets
Money market securities are not traded in a physical location; rather
these securities are traded over-the-counter through banks and dealers that are
networked together by telephone and computer lines. These intermediaries bring
together buyers and sellers from around the world. In the United States, most
trading is centered on large banks (called money center banks)
located in the major financial centers of the country. Many banks and dealers
specialize in specific instruments, such as commercial paper or bankers’ acceptances.
The United States has a central monetary authority known as the Federal
Reserve System. The Federal Reserve System (often referred to as
the “Fed”) acts as the U.S. central bank, much like the Bank of England and the
Bank of France are central banks in their respective countries.
The role of a central bank is to carry out monetary policy that serves
the best interests of the country’s economic well-being. Monetary policy is
the set of tools that a central bank can use to control the availability of
loanable funds. These tools can be used to achieve goals for the nation’s
economy. Along with the U.S. Treasury, the Fed determines policies that affect
employment and prices.
The Federal Reserve System is comprised of 12 district banks, with the
Federal Reserve Board of Governors overseeing the activities of the district
banks. The members of the Board are appointed by the President of the United
States and confirmed by the U.S. Senate, and each serves a term of 14 years,
with terms staggered through time. The president also appoints the chairman of
the board from among the members on the board. The chairman serves in this
capacity for a term of four years. [6, p.64]
The Federal Reserve District Banks are not-for-profit institutions. Their
responsibilities include (1) handling the vast majority of checkclearing in the
United States, (2) issuing money, and (3) acting as the bankers’ bank,
accepting deposits from other financial institutions. [6, p.65] Financial
managers and investors are interested in the supply and demand for money
because it is the interaction of supply and demand that ultimately affects the
interest rates paid to borrow funds and the amount of interest earned on
investing funds. The demand for money is determined by the availability of investment
opportunities. The supply of money is determined, in large part, by the actions
of a nation’s central bank.
The decisions of the Fed affect the money supply of the United States.
The money supply consists of cash and cash-like items. In fact,
there are different definitions of the money supply, depending on the cash-like
items you include. For example, the most basic definition of money supply, M1,
consists of [6, p.66]:
·
cash
(currency and bills) in circulation,
·
demand
deposits (non-interest earning deposits at banking institutions
·
that
can be withdrawn on demand),
·
other
deposits that can be readily withdrawn using checks, and
·
travelers’
checks.
A broader definition of money supply is M2, which consists of everything
in M1, plus [6, p.66]:
·
savings
deposits,
·
small
denomination time deposits,
·
money
market mutual funds, and
·
money
market deposit accounts.
A still broader definition of money supply is M3, which consists
of everything in M2, plus [6, p.67]:
·
large
denomination time deposits,
·
term
repurchase agreements issued by commercial banks and thrift institutions, term
Eurodollars held by U.S. residents, and
·
institution-owned
balances in money market funds.
Thus, the money market is a market in which the cash requirements of
market participants who are long cash are met along with the
requirements of those that are short cash. The money market is
traditionally defined as the market for financial assets that have original
maturities of one year or less. In essence, it is the market for short-term
debt instruments. Financial assets traded in this market include such
instruments as U.S. Treasury bills, commercial paper, some medium-term notes,
bankers acceptances, federal agency discount paper, most certificates of
deposit, repurchase agreements, floating-rate agreements, and federal funds.
There are three types of money market funds: (1) general money market
funds; (2) U.S. government short-term funds; and (3) short-term municipal
funds. A money market exists in virtually every country in the world, and all
such markets exhibit the characteristics we described in this chapter to some
extent. In the UK money market, unit trusts typically invest in deposits, with a
relatively small share of funds placed in money market paper such as government
bills or certificates of deposit. Economies such as Japan and Germany are based
more on banking relationships, with banks providing a large proportion of
corporate finance.
Money market
securities are short-term indebtedness. These are treasury bills (T-bills),
commercial paper, certificates of deposit (CDs), Eurodollar certificates of
deposit, bankers’ acceptances.
U.S. financial sector divided on: equity markets, stock exchanges, OTC
market, stock market indicators, bond markets, options and futures markets,
money markets. The United States has a central monetary authority known as the
Federal Reserve System.
Monetary policy is the set of tools that a central bank can use to
control the availability of loanable funds. These tools can be used to achieve
goals for the nation’s economy. Along with the U.S. Treasury, the Fed
determines policies that affect employment and prices.
Chapter
3
Money Management. Cash Management for Finance Managers
Any firm can deal in government securities, but when the Federal Reserve
engages in trades of Treasuries in order to implement monetary policy, the New
York Fed’s Open Market Desk will deal directly only with dealers that it
designates as primary or recognized dealers. The primary dealer system was
established in 1960 and is designed to ensure that firms requesting status as
primary dealers have adequate capital relative to positions assumed in Treasury
securities and that their trading volume in Treasury securities is at a
reasonable level. The Federal Reserve requires primary dealers to participate
in both open market operations and Treasury auctions. In addition, primary
dealers provide market information and analysis which may be useful to the Open
Market Desk in the implementation of monetary policy. Primary dealers include
diversified and specialized firms, money center banks, and foreign-owned
financial entities. [5, p.44]
Primary dealers trade with the investing public and with other dealer
firms. When they trade with each other, it is through intermediaries known as
interdealer brokers. Dealers leave firm bids and offers with interdealer
brokers who display the highest bid and the lowest offer in a computer network
tied to each trading desk and displayed on a monitor.
The dealer responding to a bid or offer by “hitting” or “taking” pays a
commission to the interdealer broker. [5, p.45] The size and prices of these
transactions are visible to all dealers at once. The fees charged are negotiable
and vary depending on transaction volume.
Six interdealer brokers handle the bulk of daily trading volume. They
include Cantor, Fitzgerald Securities, Inc.; Garban Ltd.; Liberty Brokerage
Inc.; RMJ Securities Corp.; Hilliard Farber & Co. Inc.; and Tullett &
Tokyo Securities Inc. These six firms serve the primary government dealers and
approximately a dozen other large government dealers aspiring to be primary
dealers. [5, p.46]
Dealers use interdealer brokers because of the speed and efficiency with
which trades can be accomplished. With the exception of Cantor, Fitzgerald
Securities Inc., interdealer brokers do not trade for their own account, and
they keep the names of the dealers involved in trades confidential. The quotes
provided on the government dealer screens represent prices in the “inside” or
“interdealer” market.
We have already learned U.S. Treasury bills are very important
instruments in the money market, there is some evidence which suggests that
bill yields no longer serve as benchmark instruments from which other money
market instruments are priced. LIBOR is the interest rate which major
international banks offer each other on Eurodollar certificates of deposit (CD)
with given maturities. The maturities range from overnight to five years. So,
references to “3-month LIBOR” indicate the interest rate that major
international banks are offering to pay to other such banks on a CD that
matures in three months. Eurodollar CDs pay simple interest at maturity on an
ACT/360 basis. [5, p.35] LIBOR serves as a pricing reference for a number of
widely traded financial products and derivatives (e.g., floaters, swaps,
structured notes, etc.).
Because of LIBOR’s importance in the global money markets, it is
instructive to examine the relationship between Treasury bill yields and LIBOR.
We expect LIBOR rates to be higher than the yields on bills of the same
maturity because investors in Eurodollars CDs are exposed to default risk.
U.S. Treasury securities and the U.S. dollar are considered “safe havens”
in times of crisis, regardless of their underlying causes. During times of
turmoil, the resulting “flight to quality” widens the spread between LIBOR
rates and T-bill rates.
U.S. money market is managed by U.S. government agencies. [5, p.54] U.S.
government agency securities can be classified by the type of issuer—those
issued by federal agencies and those issued by government sponsored
enterprises. Moreover, U.S. government agencies that provide credit for the
housing market issue two types of securities: debentures and
mortgage-backed/asset-backed securities.
Federal agencies are fully owned by the U.S.
government and have been authorized to issue securities directly in the
marketplace. Government sponsored enterprises (GSEs) are privately
owned, publicly chartered entities. [5, p.56] They were created by Congress to
reduce the cost of capital for certain borrowing sectors of the economy deemed
to be important enough to warrant assistance. The entities in these privileged
sectors include farmers, homeowners, and students. GSEs issue securities
directly in the marketplace.
The Federal National Mortgage Association (“Fannie Mae”) is a GSE
chartered by the Congress of the United States in 1938 to develop a secondary
market for residential mortgages. [5, p.70] Fannie Mae buys home loans from
banks and other mortgage lenders in the primary market and either holds the
mortgages until they mature or issues securities backed by pools of these
mortgages. Fannie Mae’s housing mission is overseen by the U.S. Department of
Housing and Urban Development (HUD), and its safety and soundness is overseen
by the Office of Federal Housing Enterprise Oversight (OFHEO). Although it is
controversial, Fannie Mae maintains a direct line of credit with the U.S.
Treasury.
If a corporation needs short-term funds, it may attempt to acquire funds
via bank borrowing. One close substitute to bank borrowing for larger
corporations with strong credit ratings is commercial paper. Commercial paper
is a short-term promissory note issued in the open market as an obligation of
the issuing entity. [2, p.40] Commercial paper is sold at a discount and pays
face value at maturity. The discount represents interest to the investor in the
period to maturity. Although some issues are in registered form, commercial
paper is typically issued in bearer form.
Although commercial paper, as noted, is the largest sector of the money
market, there is relatively little trading in the secondary market. The reason
being is that most investors in commercial paper follow a “buy and hold”
strategy. This is to be expected because investors purchase commercial paper
that matches their specific maturity requirements. Any secondary market trading
is usually concentrated among institutional investors in a few large, highly
rated issues. If investors wish to sell their commercial paper, they can
usually sell it back to the original seller either dealer or issuer.
The largest players in the global money markets are financial
institutions — namely depository institutions (i.e., commercial banks, thrifts,
and credit unions), insurance companies, and investment banks. [3, p.89] These
institutions are simultaneously among the biggest buyers and issuers of money
markets instruments. Moreover, there are certain short-term debt instruments
peculiar to financial institutions such as certificates of deposits, federal
funds, bankers acceptances, and funding agreements.
Depository institutions are required to hold reserves to meet their
reserve requirements. The level of the reserves that a depository institution
must maintain is based on its average daily deposits over the previous 14 days.
To meet these requirements, depository institutions hold reserves at their
district Federal Reserve Bank. These reserves are called federal funds.
[5, p.100]
Because no interest is earned on federal funds, a depository institution
that maintains federal funds in excess of the amount required incurs an
opportunity cost of the interest forgone on the excess reserves. Correspondingly,
there are also depository institutions whose federal funds are short of the
amount required. The federal funds market is where depository institutions buy
and sell federal funds to address this imbalance. Typically, smaller depository
institutions (e.g., smaller commercial banks, some thrifts, and credit unions)
almost always have excess reserves while money center banks usually find
themselves short of reserves and must make up the deficit. The supply of
federal funds is controlled by the Federal Reserve through its daily open
market operations.
Most transactions involving federal funds last for only one night; that
is, a depository institution with insufficient reserves that borrows excess
reserves from another financial institution will typically do so for the period
of one full day. Because these reserves are loaned for only a short time,
federal funds are often referred to as “overnight money.” [5, p.101]
The interest rate at which federal funds are bought (borrowed) by
depository institutions that need these funds and sold (lent) by depository
institutions that have excess federal funds is called the federal funds rate.
The federal funds is a benchmark short-term interest. Indeed, other short-term
interest rates (e.g., Treasury bills) often move in tandem with movements in
the federal funds rate. The rate most often cited for the federal funds market
is known as the effective federal funds rate. [5, p.101]
But, coming back to corporations, it is necessary to note, that managers
base decisions about investing in short-term projects on judgments about future
cash flows, the uncertainty of those cash flows, and the opportunity costs of
the funds to be invested.
Cash flows out of a firm as it pays for the goods and services it
purchases from others. Cash flows into the firm as customers pay for the
goods and services they purchase. When we refer to cash, we mean
the amount of cash and cash-like assets—currency, coin, and bank balances. [6,
p.642] When we refer to cash management, we mean management of cash
inflows and outflows, as well as the stock of cash on hand.
The primary players in the global money markets are banking and financial
institutions which include investment banks, commercial banks, thrifts and
other deposit and loan institutions. Banking activity and the return it
generates reflects the bank’s asset allocation policies. Asset allocation
decisions are largely influenced by the capital considerations that such an
allocation implies and the capital costs incurred. The cost of capital must, in
turn, take into account the regulatory capital implications of the
positions taken by a trading desk. [5, p.307] Therefore, money market
participants must understand regulatory capital issues regardless of the
products they trade or they will not fully understand the cost of their own
capital or the return on its use.
The rules defining what constitutes capital and how much of it to
allocate are laid out in the Bank for International Settlements (BIS)
guidelines, known as the Basel rules. [5, p.310] Although the BIS is
not a regulatory body per se and its pronouncements carry no legislative
weight, to maintain investors and public confidence national authorities
endeavor to demonstrate that they follow the Basel rules at a minimum.
So, any firm
can deal in government securities; the primary dealer system was established in
1960. Primary dealers include diversified and specialized firms, money center
banks, and foreign-owned financial entities. The dealer responding to a bid or
offer by “hitting” or “taking” pays a commission to the interdealer broker.
Only six interdealer brokers handle the bulk of daily trading volume.
Dealers use
interdealer brokers because of the speed and efficiency with which trades can
be accomplished. They use LIBOR. LIBOR is the interest rate which major
international banks offer each other on Eurodollar certificates of deposit (CD)
with given maturities.
U.S. money
market is managed by U.S. government agencies. Federal agencies are
fully owned by the U.S. government and have been authorized to issue securities
directly in the marketplace.
The largest
players in the global money markets are financial institutions — namely
depository institutions (i.e., commercial banks, thrifts, and credit unions),
insurance companies, and investment banks. Most transactions involving federal
funds last for only one night.
The primary
players in the global money markets are banking and financial institutions. The
rules defining what constitutes capital and how much of it to allocate are laid
out in the Bank for International Settlements (BIS) guidelines.
Conclusion
So, we have
considered the global money markets. It is possible to draw the following
conclusions. The simple statement, that money is a commodity whose economic
function is to facilitate the interchange of goods and services. But money
carries out also other functions. These are function
of money as a general medium of
payment, and the functions of money as a transmitter of value through
time and space. There are 3 categories of money: commodity money, fiat money,
credit money. And the last - money is not a free good.
The money
market is a market in which the cash requirements of market participants who
are long cash are met along with the requirements of those that are short
cash. The money market is traditionally defined as the market for financial
assets that have original maturities of one year or less. In essence, it is the
market for short-term debt instruments. Financial assets traded in this market
include such instruments as U.S. Treasury bills, commercial paper, some
medium-term notes, bankers acceptances, federal agency discount paper, most
certificates of deposit, repurchase agreements, floating-rate agreements, and
federal funds.
There are
three types of money market funds: (1) general money market funds; (2) U.S.
government short-term funds; and (3) short-term municipal funds. A money market
exists in virtually every country in the world, and all such markets exhibit
the characteristics we described in this chapter to some extent.
Money market
securities are short-term indebtedness. These are treasury bills (T-bills),
commercial paper, certificates of deposit (CDs), Eurodollar certificates of
deposit, bankers’ acceptances.
U.S. financial sector divided on: equity markets, stock exchanges, OTC
market, stock market indicators, bond markets, options and futures markets,
money markets. The United States has a central monetary authority known as the
Federal Reserve System.
Monetary policy is the set of tools that a central bank can use to
control the availability of loanable funds. These tools can be used to achieve
goals for the nation’s economy. Along with the U.S. Treasury, the Fed
determines policies that affect employment and prices.
Any firm can
deal in government securities; the primary dealer system was established in
1960. Primary dealers include diversified and specialized firms, money center
banks, and foreign-owned financial entities. The dealer responding to a bid or
offer by “hitting” or “taking” pays a commission to the interdealer broker.
Only six interdealer brokers handle the bulk of daily trading volume.
U.S. money
market is managed by U.S. government agencies. Federal agencies are
fully owned by the U.S. government and have been authorized to issue securities
directly in the marketplace.
The largest
players in the global money markets are financial institutions — namely
depository institutions (i.e., commercial banks, thrifts, and credit unions),
insurance companies, and investment banks.
Bibliography
1. Ludwig von Mises. The
Theory of Money and Credit. Indianapolis:
Liberty Fund,
1982.
2. Ralph Vince. The
Mathematics of Money Management. New Jersey: John Wiley & Sons, Inc.,
1992.
3. Dr. Randall G. Holcombe. Public
Finance. New York: Academic Press, 2000.
4. J. Orlin Grabbe. Chaos
& Fractals in Financial Markets. 2001.
[http://www.aci.net/kalliste/chaos_index.htm]
5. Frank J. Fabozzi, Steven
V. Mann, Moorad Choudhry. The Global Money Markets. New Jersey: John
Wiley & Sons, Inc., 2002.
6. Frank J. Fabozzi. Financial
Management and Analysis. New Jersey: John Wiley & Sons, Inc., 2003.
[1]
A Eurocurrency is a currency that is traded outside of its
national border, and can be any currency rather than just a European
one.