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The document provides an in-depth overview of financial market instruments, detailing various types such as equity, debt, derivatives, and money market instruments, along with their characteristics and roles in capital raising and risk management. It emphasizes the functions of these instruments in both capital and money markets, highlighting their importance for investors, businesses, and governments. Additionally, it discusses the utility of mutual funds and repurchase agreements in managing liquidity and investment strategies.

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UNIT -10 FINANCIAL MARKET INSRTUMENTS Prof. Sonika Seth
TLEP- UNIT 10 Week 10: 04/11 -10/11 Financial Market Instruments Quadrant 1 e-Content 2. Watch the e-Learning content on L10: “Financial Market Instruments”. 3. Read the e-LM on Unit 10: “Financial Market Instruments”. Quadrant 2 e-Tutorial 1. Revise “L9: “Financial Derivatives” recording of the live Session. 5. Attend the live session #10 on “Financial Market Instruments” Quadrant 3 e-Assessment 4. Take the formative assessment for “L10: Financial Market Instruments”. 6. After the live session, repeat the formative assessment for L10: “Financial Market Instruments” for self-assessment 7. Draft an assignment on Financial Market Instruments and its role in nation’s development. Quadrant 4 Discussions 8. Participate in collaborative learning by discussion on Financial Market Instruments.
Content: • Introduction to Financial Market • Money Market • Money Market Instruments • Repo and Reverse Repo • Promissory Notes • Government Securities and Bonds • Mutual Funds. Learning Outcome: Acquire adequate knowledge about Financial Market Instruments.
Financial market instruments • Financial market instruments are tradable assets that represent financial value. • These instruments are used by investors, businesses, and governments to raise capital, manage risk, and make investments. • They are traded in financial markets, which can be physical locations (such as stock exchanges) or electronic platforms (such as online trading platforms). • Financial market instruments can be categorized into several types based on their characteristics and features.
Types of financial market instruments
1. Equity Instruments: • Common Stocks: Represent ownership in a company. Stockholders have voting rights and may receive dividends. • Preferred Stocks: Similar to common stocks but with fixed dividends. Preferred stockholders have a higher claim on the company's assets in case of bankruptcy. 2. Debt Instruments: • Bonds: Debt securities issued by governments, municipalities, or corporations. Investors lend money to the issuer in exchange for periodic interest payments and the return of principal at maturity. • Treasury Bills (T-bills): Short-term government debt instruments with maturities typically ranging from a few days to one year. • Corporate Bonds: Issued by corporations to raise capital. They offer higher yields than government bonds but come with higher risk. • Municipal Bonds: Issued by local governments to finance public infrastructure projects.
3. Derivative Instruments: • Futures Contracts: Agreements to buy or sell an asset at a future date for a price agreed upon today. Used to hedge against price fluctuations. • Options Contracts: Give the holder the right (but not the obligation) to buy or sell an asset at a predetermined price before or at expiration. Options are often used for hedging and speculation. • Swaps: Agreements where two parties exchange cash flows or other financial instruments. Common types include interest rate swaps and currency swaps. 4. Money Market Instruments: • Commercial Papers: Short-term unsecured promissory notes issued by corporations to raise funds for a short period, usually less than a year. • Certificates of Deposit (CDs): Time deposits offered by banks with fixed terms and specified interest rates. • Repurchase Agreements (Repos): Short-term borrowing where one party sells securities to another party with an agreement to repurchase them at a higher price.
5. Foreign Exchange Instruments: • Spot Transactions: Immediate exchange of one currency for another at the prevailing exchange rate. • Currency Swaps: Agreements between two parties to exchange currencies for a specific period and then reverse the exchange at a later date. 6. Commodity Instruments: • Futures Contracts: Commodities such as oil, gold, agricultural products, and metals can be traded through futures contracts, allowing producers and consumers to hedge against price fluctuations.
7. Real Estate Instruments: • Real Estate Investment Trusts (REITs): Companies that own, operate, or finance income-producing real estate. Investors can buy shares in REITs, providing exposure to the real estate market. 8. Collectibles and Alternative Investments: • Art, Antiques, and Collectibles: Tangible assets that can appreciate in value over time. • Cryptocurrencies: Digital or virtual currencies that use cryptography for security. Examples include Bitcoin and Ethereum.
Capital market & Money market instruments • Capital market and money market are two major segments of the financial market, each serving different purposes and catering to varying maturity periods of financial instruments. • Capital Market Instruments: Capital market instruments are used for long-term investments, typically with maturities exceeding one year. They are instrumental in raising capital for businesses and governments.
Capital market instruments: • Equity Instruments: • Common Stocks: Represent ownership in a company and provide voting rights and dividends. • Preferred Stocks: Offer fixed dividends and higher claim on assets compared to common stocks. • Debt Instruments: • Bonds: Long-term debt securities issued by governments, municipalities, or corporations. They pay periodic interest and return the principal at maturity. • Corporate Bonds: Issued by companies to raise funds for various purposes. • Municipal Bonds: Issued by local governments to finance public infrastructure projects. • Derivative Instruments: • Futures Contracts: Agreements to buy or sell an asset at a future date for a predetermined price. • Options Contracts: Provide the holder with the right (but not the obligation) to buy or sell an asset at a specified price. • Swaps: Financial agreements where two parties exchange cash flows or other financial instruments
Money Market • Money market is a segment of the financial market where short-term borrowing and lending of funds occur. • It deals in financial instruments with high liquidity and short maturities, usually one year or less. • The money market provides a mechanism for the central bank, financial institutions, governments, and corporations to manage their short-term cash needs and invest excess funds for a short duration.
Money Market Instruments: • Treasury Bills (T-bills): • Issuer: Government • Maturity: Typically ranges from a few days to one year. • Purpose: Governments use T-bills to raise funds for short-term needs. Investors buy T-bills at a discount and receive the face value upon maturity, the difference being the interest earned. • Commercial Papers (CPs): • Issuer: Corporations, financial institutions • Maturity: Usually ranges from 1 day to 270 days. • Purpose: Companies issue commercial papers to meet short-term funding requirements. Investors earn interest on the face value of the CP.
• Certificates of Deposit (CDs): • Issuer: Banks and financial institutions • Maturity: Varies, commonly ranges from a few months to a few years. • Purpose: Banks issue CDs to raise funds. Investors deposit money for a specified period, and upon maturity, they receive the principal along with interest. • Repurchase Agreements (Repos): • Parties: Borrower (seller of securities) and Lender (buyer of securities) • Maturity: Usually overnight but can be longer. • Purpose: Borrowers sell securities (usually government bonds) to lenders with an agreement to repurchase them at a slightly higher price. Repos are commonly used for short-term funding by financial institutions.
• Banker's Acceptances (BAs): • Parties: Importers, exporters, banks • Maturity: Typically ranges from 30 to 180 days. • Purpose: A banker's acceptance is a time draft drawn on a bank by an exporter, representing the bank's unconditional promise to pay a specified amount at a future date. BAs are often used in international trade transactions. • Money Market Mutual Funds (MMMFs): • Managed by: Mutual fund companies • Investment: MMMFs invest in various money market instruments, offering investors an opportunity to participate in the money market without directly holding the instruments. • Purpose: Provides individuals and institutions with a convenient way to invest in the money market.
Features of Money Market Instruments: • High Liquidity: Money market instruments are highly liquid, allowing investors to convert them into cash quickly without significant price fluctuations. • Low Risk: These instruments are considered relatively low-risk investments compared to other financial instruments due to their short maturities and high credit quality issuers. • Market Determined Interest Rates: The interest rates on money market instruments are influenced by market demand and supply dynamics, economic conditions, and central bank policies. • Diverse Investors: Money market instruments attract a wide range of investors, including individual investors, corporations, financial institutions, and government entities. • Role in Monetary Policy: Central banks use money market operations to implement monetary policy, influencing interest rates and controlling money supply.
Role of money market instruments 1. Liquidity Management: • Banks and Financial Institutions: Money market instruments allow banks to manage their short-term liquidity needs efficiently. They can invest excess funds in these instruments to earn interest while ensuring they have enough liquid assets to meet immediate withdrawal demands from depositors. • Corporate Treasuries: Corporations use money market instruments to park surplus cash temporarily, allowing them to earn a return on idle funds until they are needed for operational or investment purposes.
2. Short-Term Funding: • Corporations: Companies often issue commercial papers to raise short-term funds for working capital, inventory management, or to meet other immediate financial obligations. This provides them with an alternative to bank loans. • Financial Institutions: Banks and financial institutions use money market instruments, including repurchase agreements (repos), to borrow funds for short durations, enabling them to maintain their reserve requirements and manage their balance sheets effectively.
3. Government Financing: • Central Governments: Governments issue Treasury Bills (T- bills) to raise funds quickly to cover budget deficits or manage short-term financial needs. T-bills are popular money market instruments for governments globally. • Local Governments: Municipalities issue short-term debt instruments to finance public projects or bridge temporary budget gaps.
4. Investment and Diversification: • Individual Investors: Money market instruments provide individual investors with a safe and low-risk investment option. Money market mutual funds allow retail investors to participate indirectly in the money market, providing them with diversification and professional management of their investments. • Institutional Investors: Institutional investors, such as pension funds and insurance companies, use money market instruments to manage their cash positions efficiently and ensure they can meet their financial obligations.
5. Monetary Policy Implementation: • Central Banks: Central banks use money market operations to implement monetary policy. By buying or selling money market instruments, central banks influence the money supply, short-term interest rates, and overall economic activity. 6. Risk Management: • Hedging and Risk Mitigation: Derivative money market instruments, such as interest rate swaps and options, enable market participants to hedge against interest rate fluctuations, reducing their exposure to interest rate risk. 7. International Trade and Finance: • Trade Financing: Banker's acceptances (BAs) facilitate international trade by providing a mechanism for importers and exporters to ensure payment and delivery of goods. • Currency Exchange: Money market instruments like foreign exchange swaps and currency futures enable participants to manage currency risk in international transactions.
Repurchase Agreements (Repos) and Reverse Repurchase Agreements (Reverse Repos) • Repurchase Agreements (Repos) and Reverse Repurchase Agreements (Reverse Repos) are financial transactions commonly used in the money markets. • They are short-term lending arrangements between parties, often financial institutions and central banks or other financial institutions, involving the sale and repurchase of securities. • These transactions are essential tools for managing short- term liquidity and interest rates in the financial markets.
Repurchase Agreements (Repos): 1.Definition: A repo, or repurchase agreement, is a short-term borrowing arrangement where a seller sells securities to a buyer with an agreement to repurchase them at a specified future date and a predetermined price. Essentially, it's a collateralized loan, with the securities serving as collateral. 2. Parties Involved: • Seller: The party selling the securities. • Buyer: The party purchasing the securities and lending money to the seller. 3. Process: • The seller sells securities (such as government bonds) to the buyer and agrees to repurchase them at a later date, typically the next day or within a few days. • The buyer provides funds to the seller, effectively lending money against the collateral of the securities. .
4. Purpose: • Liquidity Management: Sellers (usually financial institutions) use repos to raise short-term funds while keeping the securities on their balance sheets. • Collateralized Lending: Buyers (often other financial institutions or central banks) earn interest on their cash by lending it to the seller, secured by the collateral of the securities. 5. Risk Management: • Repos are secured transactions, meaning if the seller fails to repurchase the securities, the buyer can sell the collateral to recover the funds
Reverse Repurchase Agreements (Reverse Repos ) 1. Definition: A reverse repo is the opposite of a repo. It involves a buyer lending funds to a seller against the collateral of securities, with an agreement that the seller will repurchase the securities at a specified future date and price. 2. Parties Involved: • Buyer: The party lending funds and purchasing the securities. • Seller: The party borrowing funds and providing securities as collateral. 3. Process: • The buyer provides funds to the seller and receives securities as collateral. • The seller agrees to repurchase the securities at a later date, typically the next day or within a few days, at a predetermined price.
4. Purpose: • Investment of Surplus Funds: Buyers (such as money market funds or central banks) use reverse repos to invest excess cash in short-term, safe assets. • Collateralized Borrowing: Sellers (often financial institutions) use reverse repos to raise short-term funds, pledging securities as collateral. 5. Risk Management: • Similar to repos, reverse repos are secured transactions. If the seller defaults, the buyer can sell the securities to recover the funds.
Key Points to Note: • Both repos and reverse repos are crucial tools for managing short-term liquidity in the financial markets. • Interest rates in these transactions, known as the repo rate, are determined by the market forces of supply and demand. • Central banks use repos and reverse repos as monetary policy instruments to influence money supply, liquidity, and interest rates in the economy. • These transactions provide flexibility to financial institutions for managing their cash positions and investing in short-term securities, thereby contributing to the stability and efficiency of the financial system.
Role of Repurchase Agreements (Repos): • Liquidity Management for Borrowers: • Financial Institutions: Repos provide a way for financial institutions to raise short-term funds. By selling securities and agreeing to repurchase them later, these institutions can meet their liquidity needs, manage short-term obligations, and maintain regulatory requirements. • Collateralized Lending for Investors: • Investors (Such as Money Market Funds): Investors use repos to earn interest on their surplus cash by lending it to financial institutions, with the securities serving as collateral. It provides a secure way to invest excess funds in the short term. • Monetary Policy Implementation: • Central Banks: Central banks use repo operations to implement monetary policy. By conducting repos, central banks can influence the money supply, manage short-term interest rates, and provide liquidity to the financial system, promoting financial stability. • Facilitating Short-Selling: • Traders and Hedge Funds: Repos enable traders and hedge funds to borrow securities for short-selling strategies. Short-selling involves selling borrowed securities in anticipation of buying them back at a lower price, allowing traders to profit from falling asset prices.
Role of Reverse Repurchase Agreements (Reverse Repos): • Investment of Excess Cash: • Central Banks and Money Market Funds: Reverse repos offer a secure way for institutions to invest excess cash for the short term. Central banks use reverse repos to absorb excess liquidity from the banking system, which can help control inflationary pressures. • Providing Short-Term Funding: • Financial Institutions: Reverse repos enable financial institutions to borrow cash for short durations by pledging securities as collateral. This mechanism helps them manage their funding needs and balance their portfolios effectively. • Managing Liquidity: • Central Banks: Central banks use reverse repos as a tool to manage liquidity in the banking system. By conducting reverse repo operations, they can withdraw excess money supply from the market, which can help stabilize interest rates and control inflation. • Setting a Floor for Short-Term Interest Rates: • Monetary Policy Implementation: Central banks use reverse repos to set a floor for short-term interest rates. The interest rate paid on reverse repos serves as a benchmark, influencing other short- term rates in the market. • Risk Management: • Market Participants: Reverse repos provide a safe way for investors to park their funds temporarily, reducing their exposure to credit and market risks. The collateralization of the transaction ensures that the funds are secured by high-quality assets.
Government Securities and Bonds: Government Securities: • Government securities are financial instruments issued by a government, typically through its central bank or treasury, to raise capital. • These securities are considered low-risk investments because they are backed by the government's credit, making them relatively safe for investors. • Government securities are widely traded in the financial markets and serve various purposes, including financing government expenditure, managing liquidity, and implementing monetary policy.
Mutual Fund • A mutual fund is a professionally managed investment vehicle that pools money from multiple investors and invests it in a diversified portfolio of stocks, bonds, or other securities, depending on the fund's objective. • The assets of a mutual fund are managed by professional fund managers, who make investment decisions based on the fund's stated investment objectives and strategies.
How Mutual Funds Work: • Pooling of Funds: • Investors contribute their money to the mutual fund, and in return, they receive units or shares of the fund. • Each investor participates proportionally in the gains or losses of the fund based on the number of units or shares they own. • Professional Management: • Fund managers, along with a team of analysts and researchers, manage the mutual fund's investments. • Fund managers make investment decisions, buy and sell securities, and aim to achieve the fund's investment objectives.
• Diversification: • Mutual funds provide diversification by investing in a broad range of assets. This diversification spreads the risk across different securities, reducing the impact of poor performance of a single investment on the overall portfolio. • Liquidity: • Mutual fund units are generally redeemable on any business day, providing investors with liquidity. Investors can buy or sell fund shares at the fund's net asset value (NAV) based on the market price at the end of the trading day.
Types of Mutual Funds: • Equity Funds: Invest primarily in stocks, offering the potential for high returns and higher risk. • Bond Funds: Invest in bonds and other fixed-income securities, providing stable income and lower risk compared to equity funds. • Money Market Funds: Invest in short-term, low-risk instruments like Treasury bills and commercial paper, suitable for investors seeking preservation of capital and liquidity. • Index Funds: Aim to replicate the performance of a specific market index, providing investors with returns similar to the index they track. • Sector Funds: Concentrate investments in specific sectors such as technology, healthcare, or energy, allowing investors to focus on specific industries. • Balanced Funds: Invest in a mix of stocks, bonds, and other securities to provide a balance between income and capital appreciation.
Advantages of Mutual Funds: • Professional Management: Experienced fund managers make investment decisions on behalf of investors based on in-depth research and analysis. • Diversification: Mutual funds offer diversification across various assets, reducing risk by spreading investments. • Liquidity: Investors can buy or sell mutual fund shares on any business day, providing liquidity and flexibility. • Accessibility: Mutual funds allow small investors to access a diversified portfolio of securities with relatively low investment amounts. • Regulation and Transparency: Mutual funds are regulated by government authorities, ensuring transparency and investor protection.
Considerations for Investors: • Investment Objectives: Choose a mutual fund that aligns with your investment goals, whether it's income, growth, or a balanced approach. • Risk Tolerance: Consider your risk tolerance when selecting a mutual fund. Equity funds generally have higher potential returns but also higher volatility. • Fees and Expenses: Be aware of the fees and expenses associated with mutual funds, including management fees, sales charges, and operating expenses. • Performance History: Review the fund's historical performance, although past performance does not guarantee future results. • Diversification: Evaluate the fund's diversification strategy to ensure it aligns with your risk management preferences.
FMUNNKJJnit_10.pptxbjjnjnjnjnnnjsnjmnsnsn
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FMUNNKJJnit_10.pptxbjjnjnjnjnnnjsnjmnsnsn

  • 2.
    UNIT -10 FINANCIAL MARKETINSRTUMENTS Prof. Sonika Seth
  • 3.
    TLEP- UNIT 10 Week10: 04/11 -10/11 Financial Market Instruments Quadrant 1 e-Content 2. Watch the e-Learning content on L10: “Financial Market Instruments”. 3. Read the e-LM on Unit 10: “Financial Market Instruments”. Quadrant 2 e-Tutorial 1. Revise “L9: “Financial Derivatives” recording of the live Session. 5. Attend the live session #10 on “Financial Market Instruments” Quadrant 3 e-Assessment 4. Take the formative assessment for “L10: Financial Market Instruments”. 6. After the live session, repeat the formative assessment for L10: “Financial Market Instruments” for self-assessment 7. Draft an assignment on Financial Market Instruments and its role in nation’s development. Quadrant 4 Discussions 8. Participate in collaborative learning by discussion on Financial Market Instruments.
  • 4.
    Content: • Introduction toFinancial Market • Money Market • Money Market Instruments • Repo and Reverse Repo • Promissory Notes • Government Securities and Bonds • Mutual Funds. Learning Outcome: Acquire adequate knowledge about Financial Market Instruments.
  • 5.
    Financial market instruments •Financial market instruments are tradable assets that represent financial value. • These instruments are used by investors, businesses, and governments to raise capital, manage risk, and make investments. • They are traded in financial markets, which can be physical locations (such as stock exchanges) or electronic platforms (such as online trading platforms). • Financial market instruments can be categorized into several types based on their characteristics and features.
  • 6.
    Types of financialmarket instruments
  • 7.
    1. Equity Instruments: •Common Stocks: Represent ownership in a company. Stockholders have voting rights and may receive dividends. • Preferred Stocks: Similar to common stocks but with fixed dividends. Preferred stockholders have a higher claim on the company's assets in case of bankruptcy. 2. Debt Instruments: • Bonds: Debt securities issued by governments, municipalities, or corporations. Investors lend money to the issuer in exchange for periodic interest payments and the return of principal at maturity. • Treasury Bills (T-bills): Short-term government debt instruments with maturities typically ranging from a few days to one year. • Corporate Bonds: Issued by corporations to raise capital. They offer higher yields than government bonds but come with higher risk. • Municipal Bonds: Issued by local governments to finance public infrastructure projects.
  • 8.
    3. Derivative Instruments: •Futures Contracts: Agreements to buy or sell an asset at a future date for a price agreed upon today. Used to hedge against price fluctuations. • Options Contracts: Give the holder the right (but not the obligation) to buy or sell an asset at a predetermined price before or at expiration. Options are often used for hedging and speculation. • Swaps: Agreements where two parties exchange cash flows or other financial instruments. Common types include interest rate swaps and currency swaps. 4. Money Market Instruments: • Commercial Papers: Short-term unsecured promissory notes issued by corporations to raise funds for a short period, usually less than a year. • Certificates of Deposit (CDs): Time deposits offered by banks with fixed terms and specified interest rates. • Repurchase Agreements (Repos): Short-term borrowing where one party sells securities to another party with an agreement to repurchase them at a higher price.
  • 9.
    5. Foreign ExchangeInstruments: • Spot Transactions: Immediate exchange of one currency for another at the prevailing exchange rate. • Currency Swaps: Agreements between two parties to exchange currencies for a specific period and then reverse the exchange at a later date. 6. Commodity Instruments: • Futures Contracts: Commodities such as oil, gold, agricultural products, and metals can be traded through futures contracts, allowing producers and consumers to hedge against price fluctuations.
  • 10.
    7. Real EstateInstruments: • Real Estate Investment Trusts (REITs): Companies that own, operate, or finance income-producing real estate. Investors can buy shares in REITs, providing exposure to the real estate market. 8. Collectibles and Alternative Investments: • Art, Antiques, and Collectibles: Tangible assets that can appreciate in value over time. • Cryptocurrencies: Digital or virtual currencies that use cryptography for security. Examples include Bitcoin and Ethereum.
  • 11.
    Capital market &Money market instruments • Capital market and money market are two major segments of the financial market, each serving different purposes and catering to varying maturity periods of financial instruments. • Capital Market Instruments: Capital market instruments are used for long-term investments, typically with maturities exceeding one year. They are instrumental in raising capital for businesses and governments.
  • 12.
    Capital market instruments: •Equity Instruments: • Common Stocks: Represent ownership in a company and provide voting rights and dividends. • Preferred Stocks: Offer fixed dividends and higher claim on assets compared to common stocks. • Debt Instruments: • Bonds: Long-term debt securities issued by governments, municipalities, or corporations. They pay periodic interest and return the principal at maturity. • Corporate Bonds: Issued by companies to raise funds for various purposes. • Municipal Bonds: Issued by local governments to finance public infrastructure projects. • Derivative Instruments: • Futures Contracts: Agreements to buy or sell an asset at a future date for a predetermined price. • Options Contracts: Provide the holder with the right (but not the obligation) to buy or sell an asset at a specified price. • Swaps: Financial agreements where two parties exchange cash flows or other financial instruments
  • 13.
    Money Market • Moneymarket is a segment of the financial market where short-term borrowing and lending of funds occur. • It deals in financial instruments with high liquidity and short maturities, usually one year or less. • The money market provides a mechanism for the central bank, financial institutions, governments, and corporations to manage their short-term cash needs and invest excess funds for a short duration.
  • 14.
    Money Market Instruments: •Treasury Bills (T-bills): • Issuer: Government • Maturity: Typically ranges from a few days to one year. • Purpose: Governments use T-bills to raise funds for short-term needs. Investors buy T-bills at a discount and receive the face value upon maturity, the difference being the interest earned. • Commercial Papers (CPs): • Issuer: Corporations, financial institutions • Maturity: Usually ranges from 1 day to 270 days. • Purpose: Companies issue commercial papers to meet short-term funding requirements. Investors earn interest on the face value of the CP.
  • 15.
    • Certificates ofDeposit (CDs): • Issuer: Banks and financial institutions • Maturity: Varies, commonly ranges from a few months to a few years. • Purpose: Banks issue CDs to raise funds. Investors deposit money for a specified period, and upon maturity, they receive the principal along with interest. • Repurchase Agreements (Repos): • Parties: Borrower (seller of securities) and Lender (buyer of securities) • Maturity: Usually overnight but can be longer. • Purpose: Borrowers sell securities (usually government bonds) to lenders with an agreement to repurchase them at a slightly higher price. Repos are commonly used for short-term funding by financial institutions.
  • 16.
    • Banker's Acceptances(BAs): • Parties: Importers, exporters, banks • Maturity: Typically ranges from 30 to 180 days. • Purpose: A banker's acceptance is a time draft drawn on a bank by an exporter, representing the bank's unconditional promise to pay a specified amount at a future date. BAs are often used in international trade transactions. • Money Market Mutual Funds (MMMFs): • Managed by: Mutual fund companies • Investment: MMMFs invest in various money market instruments, offering investors an opportunity to participate in the money market without directly holding the instruments. • Purpose: Provides individuals and institutions with a convenient way to invest in the money market.
  • 17.
    Features of MoneyMarket Instruments: • High Liquidity: Money market instruments are highly liquid, allowing investors to convert them into cash quickly without significant price fluctuations. • Low Risk: These instruments are considered relatively low-risk investments compared to other financial instruments due to their short maturities and high credit quality issuers. • Market Determined Interest Rates: The interest rates on money market instruments are influenced by market demand and supply dynamics, economic conditions, and central bank policies. • Diverse Investors: Money market instruments attract a wide range of investors, including individual investors, corporations, financial institutions, and government entities. • Role in Monetary Policy: Central banks use money market operations to implement monetary policy, influencing interest rates and controlling money supply.
  • 18.
    Role of moneymarket instruments 1. Liquidity Management: • Banks and Financial Institutions: Money market instruments allow banks to manage their short-term liquidity needs efficiently. They can invest excess funds in these instruments to earn interest while ensuring they have enough liquid assets to meet immediate withdrawal demands from depositors. • Corporate Treasuries: Corporations use money market instruments to park surplus cash temporarily, allowing them to earn a return on idle funds until they are needed for operational or investment purposes.
  • 19.
    2. Short-Term Funding: •Corporations: Companies often issue commercial papers to raise short-term funds for working capital, inventory management, or to meet other immediate financial obligations. This provides them with an alternative to bank loans. • Financial Institutions: Banks and financial institutions use money market instruments, including repurchase agreements (repos), to borrow funds for short durations, enabling them to maintain their reserve requirements and manage their balance sheets effectively.
  • 20.
    3. Government Financing: •Central Governments: Governments issue Treasury Bills (T- bills) to raise funds quickly to cover budget deficits or manage short-term financial needs. T-bills are popular money market instruments for governments globally. • Local Governments: Municipalities issue short-term debt instruments to finance public projects or bridge temporary budget gaps.
  • 21.
    4. Investment andDiversification: • Individual Investors: Money market instruments provide individual investors with a safe and low-risk investment option. Money market mutual funds allow retail investors to participate indirectly in the money market, providing them with diversification and professional management of their investments. • Institutional Investors: Institutional investors, such as pension funds and insurance companies, use money market instruments to manage their cash positions efficiently and ensure they can meet their financial obligations.
  • 22.
    5. Monetary PolicyImplementation: • Central Banks: Central banks use money market operations to implement monetary policy. By buying or selling money market instruments, central banks influence the money supply, short-term interest rates, and overall economic activity. 6. Risk Management: • Hedging and Risk Mitigation: Derivative money market instruments, such as interest rate swaps and options, enable market participants to hedge against interest rate fluctuations, reducing their exposure to interest rate risk. 7. International Trade and Finance: • Trade Financing: Banker's acceptances (BAs) facilitate international trade by providing a mechanism for importers and exporters to ensure payment and delivery of goods. • Currency Exchange: Money market instruments like foreign exchange swaps and currency futures enable participants to manage currency risk in international transactions.
  • 23.
    Repurchase Agreements (Repos)and Reverse Repurchase Agreements (Reverse Repos) • Repurchase Agreements (Repos) and Reverse Repurchase Agreements (Reverse Repos) are financial transactions commonly used in the money markets. • They are short-term lending arrangements between parties, often financial institutions and central banks or other financial institutions, involving the sale and repurchase of securities. • These transactions are essential tools for managing short- term liquidity and interest rates in the financial markets.
  • 24.
    Repurchase Agreements (Repos): 1.Definition:A repo, or repurchase agreement, is a short-term borrowing arrangement where a seller sells securities to a buyer with an agreement to repurchase them at a specified future date and a predetermined price. Essentially, it's a collateralized loan, with the securities serving as collateral. 2. Parties Involved: • Seller: The party selling the securities. • Buyer: The party purchasing the securities and lending money to the seller. 3. Process: • The seller sells securities (such as government bonds) to the buyer and agrees to repurchase them at a later date, typically the next day or within a few days. • The buyer provides funds to the seller, effectively lending money against the collateral of the securities. .
  • 25.
    4. Purpose: • LiquidityManagement: Sellers (usually financial institutions) use repos to raise short-term funds while keeping the securities on their balance sheets. • Collateralized Lending: Buyers (often other financial institutions or central banks) earn interest on their cash by lending it to the seller, secured by the collateral of the securities. 5. Risk Management: • Repos are secured transactions, meaning if the seller fails to repurchase the securities, the buyer can sell the collateral to recover the funds
  • 26.
    Reverse Repurchase Agreements(Reverse Repos ) 1. Definition: A reverse repo is the opposite of a repo. It involves a buyer lending funds to a seller against the collateral of securities, with an agreement that the seller will repurchase the securities at a specified future date and price. 2. Parties Involved: • Buyer: The party lending funds and purchasing the securities. • Seller: The party borrowing funds and providing securities as collateral. 3. Process: • The buyer provides funds to the seller and receives securities as collateral. • The seller agrees to repurchase the securities at a later date, typically the next day or within a few days, at a predetermined price.
  • 27.
    4. Purpose: • Investmentof Surplus Funds: Buyers (such as money market funds or central banks) use reverse repos to invest excess cash in short-term, safe assets. • Collateralized Borrowing: Sellers (often financial institutions) use reverse repos to raise short-term funds, pledging securities as collateral. 5. Risk Management: • Similar to repos, reverse repos are secured transactions. If the seller defaults, the buyer can sell the securities to recover the funds.
  • 28.
    Key Points toNote: • Both repos and reverse repos are crucial tools for managing short-term liquidity in the financial markets. • Interest rates in these transactions, known as the repo rate, are determined by the market forces of supply and demand. • Central banks use repos and reverse repos as monetary policy instruments to influence money supply, liquidity, and interest rates in the economy. • These transactions provide flexibility to financial institutions for managing their cash positions and investing in short-term securities, thereby contributing to the stability and efficiency of the financial system.
  • 29.
    Role of RepurchaseAgreements (Repos): • Liquidity Management for Borrowers: • Financial Institutions: Repos provide a way for financial institutions to raise short-term funds. By selling securities and agreeing to repurchase them later, these institutions can meet their liquidity needs, manage short-term obligations, and maintain regulatory requirements. • Collateralized Lending for Investors: • Investors (Such as Money Market Funds): Investors use repos to earn interest on their surplus cash by lending it to financial institutions, with the securities serving as collateral. It provides a secure way to invest excess funds in the short term. • Monetary Policy Implementation: • Central Banks: Central banks use repo operations to implement monetary policy. By conducting repos, central banks can influence the money supply, manage short-term interest rates, and provide liquidity to the financial system, promoting financial stability. • Facilitating Short-Selling: • Traders and Hedge Funds: Repos enable traders and hedge funds to borrow securities for short-selling strategies. Short-selling involves selling borrowed securities in anticipation of buying them back at a lower price, allowing traders to profit from falling asset prices.
  • 30.
    Role of ReverseRepurchase Agreements (Reverse Repos): • Investment of Excess Cash: • Central Banks and Money Market Funds: Reverse repos offer a secure way for institutions to invest excess cash for the short term. Central banks use reverse repos to absorb excess liquidity from the banking system, which can help control inflationary pressures. • Providing Short-Term Funding: • Financial Institutions: Reverse repos enable financial institutions to borrow cash for short durations by pledging securities as collateral. This mechanism helps them manage their funding needs and balance their portfolios effectively. • Managing Liquidity: • Central Banks: Central banks use reverse repos as a tool to manage liquidity in the banking system. By conducting reverse repo operations, they can withdraw excess money supply from the market, which can help stabilize interest rates and control inflation. • Setting a Floor for Short-Term Interest Rates: • Monetary Policy Implementation: Central banks use reverse repos to set a floor for short-term interest rates. The interest rate paid on reverse repos serves as a benchmark, influencing other short- term rates in the market. • Risk Management: • Market Participants: Reverse repos provide a safe way for investors to park their funds temporarily, reducing their exposure to credit and market risks. The collateralization of the transaction ensures that the funds are secured by high-quality assets.
  • 31.
    Government Securities andBonds: Government Securities: • Government securities are financial instruments issued by a government, typically through its central bank or treasury, to raise capital. • These securities are considered low-risk investments because they are backed by the government's credit, making them relatively safe for investors. • Government securities are widely traded in the financial markets and serve various purposes, including financing government expenditure, managing liquidity, and implementing monetary policy.
  • 32.
    Mutual Fund • Amutual fund is a professionally managed investment vehicle that pools money from multiple investors and invests it in a diversified portfolio of stocks, bonds, or other securities, depending on the fund's objective. • The assets of a mutual fund are managed by professional fund managers, who make investment decisions based on the fund's stated investment objectives and strategies.
  • 33.
    How Mutual FundsWork: • Pooling of Funds: • Investors contribute their money to the mutual fund, and in return, they receive units or shares of the fund. • Each investor participates proportionally in the gains or losses of the fund based on the number of units or shares they own. • Professional Management: • Fund managers, along with a team of analysts and researchers, manage the mutual fund's investments. • Fund managers make investment decisions, buy and sell securities, and aim to achieve the fund's investment objectives.
  • 34.
    • Diversification: • Mutualfunds provide diversification by investing in a broad range of assets. This diversification spreads the risk across different securities, reducing the impact of poor performance of a single investment on the overall portfolio. • Liquidity: • Mutual fund units are generally redeemable on any business day, providing investors with liquidity. Investors can buy or sell fund shares at the fund's net asset value (NAV) based on the market price at the end of the trading day.
  • 35.
    Types of MutualFunds: • Equity Funds: Invest primarily in stocks, offering the potential for high returns and higher risk. • Bond Funds: Invest in bonds and other fixed-income securities, providing stable income and lower risk compared to equity funds. • Money Market Funds: Invest in short-term, low-risk instruments like Treasury bills and commercial paper, suitable for investors seeking preservation of capital and liquidity. • Index Funds: Aim to replicate the performance of a specific market index, providing investors with returns similar to the index they track. • Sector Funds: Concentrate investments in specific sectors such as technology, healthcare, or energy, allowing investors to focus on specific industries. • Balanced Funds: Invest in a mix of stocks, bonds, and other securities to provide a balance between income and capital appreciation.
  • 36.
    Advantages of MutualFunds: • Professional Management: Experienced fund managers make investment decisions on behalf of investors based on in-depth research and analysis. • Diversification: Mutual funds offer diversification across various assets, reducing risk by spreading investments. • Liquidity: Investors can buy or sell mutual fund shares on any business day, providing liquidity and flexibility. • Accessibility: Mutual funds allow small investors to access a diversified portfolio of securities with relatively low investment amounts. • Regulation and Transparency: Mutual funds are regulated by government authorities, ensuring transparency and investor protection.
  • 37.
    Considerations for Investors: •Investment Objectives: Choose a mutual fund that aligns with your investment goals, whether it's income, growth, or a balanced approach. • Risk Tolerance: Consider your risk tolerance when selecting a mutual fund. Equity funds generally have higher potential returns but also higher volatility. • Fees and Expenses: Be aware of the fees and expenses associated with mutual funds, including management fees, sales charges, and operating expenses. • Performance History: Review the fund's historical performance, although past performance does not guarantee future results. • Diversification: Evaluate the fund's diversification strategy to ensure it aligns with your risk management preferences.