Topic 3

Money and
foreign exchange market

MFK FIN536 Topic 3 1

At the end of the lessons, students should be able to:-

 Understand the development and structure of money market.

 Understand the operations, risks and the participants of money

market.

 Differentiate between the two categories of money market

operations.

 Describe the financial instrument available in the money market and

understand simple calculation of the instruments.

 Identify the risk in money market and how to control the risks

MFK FIN536 Topic 3 2

MFK FIN536 Topic 1 3
 Movement of funds among the surplus and the deficit
unit.

 Provide liquidity – buying and selling of money

market instruments.

 Invest and trade in variety of short-term debt

instruments.

 Over-the-counter and exchanges.

 Activities: lending and borrowing of funds.

 Backed by an active secondary market.

MFK FIN536 Topic 3 4

 Test 1
• On 13/08/09
• Topic 1, 2 and 3
• 8.00 pm to 9.30 pm
• AC572

MFK FIN536 Topic 3 5

 Provide facilities for adjusting portfolio over the short
term.

 For government: implement monetary policy and funding

of debts.

 Short term mobilization of funds among market

participants.

 Market for trading financial instruments among the SU

and DU in the financial system.

 Maturity – overnight to one year.

MFK FIN536 Topic 3 6

 Derived from the activities of borrowing and
lending funds in the professional inter-bank
market.

 As the rate is arrived at objectively, the KLIBOR is

used by some banks as a benchmark for pricing
loans to corporate bodies as well for the pricing
of other money market instruments.

MFK FIN536 Topic 3 7

 New interest rate framework announced by BNM
in April 2004.

 Indicator of the monetary policy stance and at

the same time as the target rate for the day-to-
day liquidity operations of BNM.

MFK FIN536 Topic 3 8

 Prior to 1987.

 During 1987.

 Government promote secondary market

◦ Set up cheque clearing system
◦ Reduce SRR and MLR
◦ Include well capitalized finance companies
◦ Introduced KLIBOR: anchor rate

 1989.

MFK FIN536 Topic 3 9

 In 1990: Central Bank introduced
◦ Electronic fund transfer, SPEEDS and RAM

 1993: total 21 Islamic financial products.

 1994: full fledged Islamic Banking system.

 1995, established Malaysia Rating Corporation

Berhad.

 1996: introduced FAST.

MFK FIN536 Topic 3 10

MFK FIN536 Topic 3 11
MFK FIN536 Topic 3 12
 Banks borrow money from this market.

 Why?
◦ Do not have sufficient deposit base to fund loans
operations
◦ To meet statutory reserve & minimum liquidity
requirements

 Activities:
◦ Rediscounting of money market papers.

MFK FIN536 Topic 3 13

 Example:

◦ CIMB Bank needs RM100 million for a period of

one month.
◦ Obtained directly from other bank in the same
tenor.
◦ MBB place FD with CIMB.
◦ Rate is agreed by both party.

 Credit limit/ credit line.

MFK FIN536 Topic 3 14

 Conduct in a securities market.
i. outright sale/purchase of instrument
ii. Repurchase Agreement (REPO) market

 Deficit >>>

 Surplus>>>

MFK FIN536 Topic 3 15

 Trading of short term funds among MM players.

 Standard deals in interbank market:

◦ Overnight money
◦ 7-day money
◦ Money for 1,2 and 3 months

MFK FIN536 Topic 3 16

MFK FIN536 Topic 3 17
MFK FIN536 Topic 3 18
 A borrower not able to make payment on the
agreed maturity date.

 Managing the credit risk:-

◦ Credit limit.

MFK FIN536 Topic 3 19

 Bank not able to have easy access to funds in the
market.

 Not able to convert existing assets into cash at a

reasonable market price.

 Managing the liquidity risk:-

◦ Portfolio – mixture of short-term and long-term
instruments.

MFK FIN536 Topic 3 20

 Bank’s revenue is adversely affected by the
fluctuations in interest rates.

 Managing the interest rate risk:-

◦ Monitor and predict interest rates movement.

MFK FIN536 Topic 3 21

 Bad operational system of the parties in the money market.

 For example poor IT system, reporting system and

inexperience and incompetence personnel.

 Managing the operational risk:-

◦ Invest in a suitable system.
◦ Training and development.
◦ Compensation
◦ Conducive working environment.

MFK FIN536 Topic 3 22

At the end of the lessons, students should be able to:-

 Understand the development and structure of money market.

 Understand the operations, risks and the participants of money

market.

 Differentiate between the two categories of money market

operations.

 Describe the financial instrument available in the money market and

understand simple calculation of the instruments.

 Identify the risk in money market and how to control the risks

MFK FIN536 Topic 3 23

 Foreign exchange market.

MFK FIN536 Topic 2 24

THANK
YOU…

MFK FIN536 Topic 2 25