Chapter 5 Money and Foreign Market

FIN250
CHAPTER 5
MONEY AND FOREIGN EXCHANGE
MARKET
Learning Outline:
1. Structure of Money Market
2. Money Market Operations
3. Money Market Instruments
4. Foreign Exchange Operations
5. Foreign Exchange Quotations

Learning Outcomes:
Upon completion of this topic, student should be
able to:
1. Illustrate the Structure of Money Market
2. Explain the Money Market Operations
3. Identify the Money Market Instruments
4. Describe the Foreign Exchange Operations
5. State the Foreign Exchange Quotations

1. STRUCTURE OF MONEY MARKET
MONEY MARKET
FOREIGN
EXCHANGE
MARKET
FINANCIAL
MARKETS
FINANCIAL
CAPITAL MARKET
SYSTEM
FINANCIAL
INSTITUTIONS
DERIVATIVES
MARKET
2. MONEY MARKET OPERATION
Invest and trade Activities: Backed by an

Over-the-
in variety of lending and active
counter and
short-term debt borrowing of secondary
exchanges
instruments funds market
2.1 CATEGORIES OF MONEY MARKET OPERATIONS
DIRECT LENDING AND BORROWING SALE AND PURCHASE OF MM

INSTRUMENTS
• Bank will lend (deposits) or borrow directly from another • Done in securities market.
bank.
• Indirect method of borrowing or lending funds.
• Rate is agreed by both parties.
• 2 types of securities market:
• Transactions can be done directly or through
intermediaries (money brokers) 1) Outright S&P of instruments
• Bank sell / purchase instruments
• The amount that the lender can lend is LIMITED (called
credit line or credit limit). 2) Repurchase agreement (REPO)
• - Normally depends on the financial strength & size of the • At maturity, bank repurchase MM instruments
bank. which were initially sold to customers at agreed
price for a specified future date.
The illustration of a REPO on the movement of instruments
and funds
2.2 Role of money market
For
Provide government:
facilities for implement
adjusting monetary
portfolio over policy and
the short term funding of
debts
2.3 Functions of money market
Financial
intermediaries
Operation:
Lending and
Borrowing of
funds through
2.4 List Of Money Market Participants
Commercial
Central Bank
Banks
Merchant Banks Discount Houses
Provident And Insurance

Pension Funds Companies
Corporations Money Brokers
10
3. MONEY MARKET INSTRUMENTS
Negotiable instruments of
Deposits
Banker’s Acceptance
Malaysian Government
Securities
Repurchase Agreement
Treasury Bills
Bank Negara Bills
Cagamas Bonds and Notes
Khazanah bonds
• Negotiable means transferable
3.1 Negotiable • A deposit document issued by a bank to a customer certifying that
instruments of a certain amount of money has been deposited with the bank at a
specific rate and for a specific maturity date
Deposits • Can be sold before its maturity date
• A negotiable form of instrument – if a customer wants to cash
before the maturity, he can sell it in a readily active secondary
market
• Tenure range from 1 month to 10 years
• Issued in multiple of RM 50,000
• Minimum deposit is RM 100,000 per certificate
• Maximum deposit is RM 10 million per certificate
• Interest rate of NIDs depends on interbank rates.
• The higher the deposits, the better the rate.
• Withholding tax
• 0% withholding tax for placement made by companies & 5%
for placement by individuals.
▪ A discounted instrument where the rates discounted
3.2 Banker’s can be competitively around the inter-bank MM rates
Acceptance ▪ A bill of exchange drawn on a bank, payable to the

order of the drawer for a specified amount with a
specific maturity date
▪ Created to finance a customer for a trade transaction
▪ A negotiable instrument – can be sold to investors
▪A trade financing facility available to
buyers/importers and sellers/exporters which provide
competitive source of working capital and at the same
time become an alternate form of short-term
investment for the investors
▪ Maturity – ranges from 21 days to 200 days
▪ Issued in multiples of RM1,000 with a minimum of
RM30, 000
▪ Interest-bearing instruments issued by
BNM to obtain funds from the public to 3.3 Malaysian
finance national development projects Government Securities
▪ An instrument whereby the government
agreed to pay periodic interest to the
holder and upon maturity the return of
the par value
▪ A scripless security, issued in multiples of
RM1,000 and quoted in price terms per
RM100 nominal value
▪ A sale of financial instrument by a bank with an
3.4 Repurchase undertaking to repurchase it at an agreed price on a

specified future date
Agreement ▪ Suitable for anyone who needs to manage its short-
term funds because the period dealt is normally on a
number of days basis
▪ A collateralized deposit arrangement for a specific
period at an agreed rate where the deposit is
collateralized by financial instruments e.g. NIDs, MGS,
Cagamas bonds, BAs and any others allowed by BNM
▪ Issued by BNM on behalf of the government
of Malaysia with the purpose of raising short-
3.5 Treasury term funds to finance government’s
Bills expenditure
▪ Issued on a discounted basis with maturities
not exceeding one year
▪ Short-term instruments issued by BNM on a
discounted basis with maturities not exceeding one 3.6 Bank
year Negara Bills
▪ Often used for the Open Market Operations (one of
the monetary tools of BNM)
▪ Categorized as a liquid asset for FIs compliance of
the liquidity and statutory requirements
4. FOREIGN EXCHANGE MARKET
▪ An essential market for corporation to

complete their international transaction
▪ A market where participants can buy
and sell various currencies of the world
▪ It is an exchange of a specific amount of
one currency for another between two
counterparties at an agreed rate for
delivery at a certain agreed date
4.1 List of Major Participants IN FOREX
Market:
Commercial banks Corporations
Non-bank financial and

Individuals
related institutions
Central Banks Money brokers

5. FOREIGN EXCHANGE QUOTATIONS
• To buy a currency, rate between currencies must be QUOTED.
• Involves buying a currency, and selling another currency.
• USD
• Centerpiece of the FOREX market is USD
• Considered as base currency for quotation
• 2 Types of quotations:
• Spot market
• Forward market
▪ Market for spot rate and spot date
5.1 Spot Market ▪ Spot rate – the value of the currency to be
transacted is for two good business days delivery
▪ Spot date – two days after the transaction date
▪ Transaction date – the date both parties dealt
with each other to perform the foreign currency
transaction
▪ E.g. bank X and Syarikat ABC, contact each other
on Monday to deal on a spot basis and agreed on
the rate of exchange of both currencies, then the
delivery of both currencies by both parties is on
Wednesday. Good business days means the days
exclude holidays and week-ends
▪ Forex market for value anytime after two good business days
5.2 Forward ▪ The value of the currency is to be transacted for delivery after
two good business days
Market ▪ It can be one day after spot date, @ 1 week, 1 month, 3, 6, 9, and
even 1 year rates
▪ E.g. Syarikat ABC needs USD to be delivered on Friday, and then
the bank must quote a forward rate which is different form the
spot rate.
▪ It can be higher or lower than the spot rate depending on the
interest rates differential between the two currencies
concerned.
▪ In this case, the differential is between MYR and USD interest
rates.
▪ This interest rates differential is then converted into forward
“points” or “pips” such as 3 points (0.0003) or 100 points
(0.0100)
▪ Forward rate is determined by adding the forward points to (if it
is a forward premium) or deducting the forward points from (if it
is a forward) the spot rate
END OF CHAPTER 5
THANK YOU
Study Questions
1) What is money market?
2) Describe any three (3) instruments in money market.
3) Define foreign exchange market.
4) Explain 2 types of foreign exchange quotations.
List of Reference
• Ibrahim Abdul Rahman & Siti Norbaya Mohd Rashid, Financial Market and
Banking Operations.
• Norhafizah Nordin; Norzalina Ahmad; Nur Hafizah Mohammad Ismail; and
Sabariah Nordin, Financial Markets and Institutions in Malaysia, 2022, ISBN
978-967-2486-97-8.
• Bank Negara Malaysia website (www.bnm.gov.my)

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Chapter 5 Money and Foreign Market

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FIN250

2. Money Market Operations

3. Money Market Instruments

4. Foreign Exchange Operations

5. Foreign Exchange Quotations

1. Illustrate the Structure of Money Market

2. Explain the Money Market Operations

3. Identify the Money Market Instruments

4. Describe the Foreign Exchange Operations

5. State the Foreign Exchange Quotations

Invest and trade Activities: Backed by an

DIRECT LENDING AND BORROWING SALE AND PURCHASE OF MM

Merchant Banks Discount Houses

Provident And Insurance

Corporations Money Brokers

Bank Negara Bills

Cagamas Bonds and Notes

Acceptance ▪ A bill of exchange drawn on a bank, payable to the

3.4 Repurchase undertaking to repurchase it at an agreed price on a

▪ An essential market for corporation to

Commercial banks Corporations

Non-bank financial and

Central Banks Money brokers

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