December 11, 2017

Srikaanth Kumar

Global Money Markets Freshers Interview Questions Answers

Explain What Is Money Market?

Its a Global financial market for short term borrowing and lending. The money market is where short-term obligations such as treasury bills, commercial paper and banker's acceptances are bought and sold.
What Are The Instruments Of Money Market?

Following are the instruments of money market:-

Call money

Notice money

Certificate of deposits (1989)

Commercial papers (1990)

Forward rate agreement / interest rate swaps (1999)

Bills re-discounting

What Is Money Versus Capital Markets?

The money market is the market for shorter-term securities, generally those with one year or less remaining to maturity.

The capital market is the market for longer-term securities, generally those with more than one year to maturity.

What Is Debt Versus Equity Markets?

Debt instruments are particular types of securities that require the issuer (the borrower) to pay the holder (the lender) certain fixed dollar amounts at regularly scheduled intervals until a specified time (the maturity date) is reached, regardless of the success or failure of any investment projects for which the borrowed funds are used.

What Is Primary Versus Secondary Markets?

Primary markets are securities markets in which newly issued securities are offered for sale to buyers. Secondary markets are securities markets in which existing securities that have previously been issued are resold. The initial issuer raises funds only through the primary market.

What Is Asia-pacific Money Markets?

There is significant heterogeneity in the structures of money markets across the Asia-Pacific region. With only a few exceptions, they are smaller relative to the size of their economies than those in the United States and Europe.

Broadly speaking, cash markets for short-term debt securities tend to be the most developed in the region, followed by interbank markets. Repo and foreign exchange (FX) swap markets are, in most economies, the least developed.

Some money markets, including those of Australia and Japan, are closely integrated both with the domestic economy and with international financial markets. Others, such as the Chinese market, are integrated much less. The Australian and New Zealand onshore money markets are among the most internationalised, with significant participation by foreign borrowers and investors; this partly reflects strong demand among foreign investors for securities denominated in higher-yielding currencies. Borrowing in most other markets in the region is dominated by local entities; however, where their participation is not prohibited, foreigners are often important investors.

What Is Interest Rate Collars?

The buyer of an interest rate collar purchases an interest rate cap while selling a floor indexed to the same interest rate. Borrowers with variable-rate loans buy collars to limit effective borrowing rates to a range of interest rates between some maximum, determined by the cap rate, and a minimum, which is fixed by the floor strike price; hence, the term "collar." Although buying a collar limits a borrower's ability to benefit from a significant decline in market interest rates, it has the advantage of being less expensive than buying a cap alone because the borrower earns premium income from the sale of the floor that offsets the cost of the cap. A zero-cost collar results when the premium earned by selling a floor exactly offsets the cap premium.

How To Measuring The Credit Risk Exposure Of An Interest Rate Swap?

A swap counterparty's credit risk exposure is determined by the cost of replacing the agreement in the event of a default. The cost of obtaining a replacement swap is determined by the difference between the All-In-Cost of the old swap and the AIC on a replacement swap. As an illustration, consider the case of a fixed rate payer in a swap with one year left to maturity and a 7 percent AIC. If the floating-rate payer defaults when the prevailing market rate on a one-year replacement swap is 8 percent, the nondefaulting party will be required to pay an extra 1 percent per year on the notional principal to replace the swap. The replacement value of the swap is just the net present value of the difference in interest payments.

What Is The Status Of Otc Derivatives Under Bankruptcy Law?

Before the enactment of recent amendments to the Bankruptcy Code, there was some question as to whether master swap agreement netting provisions would be legally enforceable in the event of bankruptcy. The U.S. Bankruptcy Code grants a firm in bankruptcy proceedings an "automatic stay" from the claims of its creditors. The automatic stay allows a bankrupt firm to postpone scheduled debt payments and overrides most other contractual obligations pending the resolution of all claims against the firm.

What Is The Status Of Swap Agreements Under Banking Law?

Commercial banks and thrift institutions are not subject to the provisions of the Bankruptcy Code. Instead, bank failure resolution is governed by federal and state banking laws, which gives the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC) (in the case of certain savings and loan institutions) considerable discretion in dealing with failing federally insured depository institutions.

What Are “commercial Papers”?

COMMERCIAL PAPERS (CP) is an unsecured money market instrument issued in the form of promissory notes.

What Is “certificate Of Deposits”?

CERTIFICATE OF DEPOSITS (CD) is a negotiable money market instrument and is issued in the form of USANCE promissory note.
What Is Call Money?

money loaned by a bank or other institution which is repayable on demand.

On Which Day In The Week Does Rbi Conduct The Auction To Issue The Treasury Bills?

On every Wednesday RBI conducts auction to issue treasury bills.

What Is Cd Equivalent Yield?

The CD equivalent yield makes the quoted yield on a treasury bill more comparable to yield  quotations on the other money market instrument that pay interest on a 360-day basis. It does this by taking into consideration the price of the treasury bill rather than its face value.

Is Money Market Mutual Funds And Other Short-term Investment Pools?

Short-term investment pools are a highly specialized group of money market intermediaries that includes money market mutual funds, local government investment pools, and short-term investment funds of bank trust departments. These intermediaries purchase large pools of money market instruments and sell shares in these instruments to investors. In doing so they enable individuals and other small investors to earn the yields available on money market instruments. These pools, which were virtually nonexistent before the mid- 1970s, have grown to be one of the largest financial intermediaries in the United States.

What Are The Methods Of Federal Funds Exchange?

Two methods of federal funds transfer are commonly used. To execute the first type of transfer, the lending institution authorizes the district Reserve Bank to debit its reserve account and to credit the reserve account of the borrowing institution. Fedwire, the Federal Reserve System's wire transfer network, is employed to complete a transfer.

The second method simply involves reclassifying respondent bank demand deposits at correspondent banks as federal funds borrowed. Here, the entire transaction takes place on the books of the correspondent.

What Is Large Negotiable Certificates Of Deposit?

Since the early 1960s large denomination ($100,000 or more) negotiable certificates of deposit (CDs) have been used by banks and other depository institutions as a source of purchased funds and as a means of managing their liability positions. Large negotiable CDs have also been an important component of the portfolios of money market investors. As of the end of 1992 outstanding large CDs at large banks were $114 billion.

Large CDs are generally divided into four classes based on the type of issuer because the rates paid, risk, and depth of the market vary considerably among the four types. The oldest of the four groups consists of CDs issued by U.S. banks domestically, which are called domestic CDs. Dollar-denominated CDs issued by banks abroad are known as Eurodollar CDs or Euro CDs. CDs issued by U.S. branches of foreign banks are known as Yankee CDs. Finally, CDs issued by savings and loan associations and savings banks are referred to as thrift CDs.

What Is Aggregation Or Interconnection Risk?

Aggregation or interconnection risk refers to the risk that a disruption in one market, caused by the default of a major institution or some other event, might cause widespread difficulties throughout the OTC derivatives market or even spread to other financial markets.

Market liquidity risk is one source of interconnection risk. OTC derivatives dealers operate in many different markets at once.

What Is Market Arrangements For Controlling Risks?

Managing the credit risk associated with a position in an instrument such as an interest rate swap requires credit evaluation skills of the type commonly associated with bank lending. Thus, as the swaps market evolved into a dealer market where financial intermediaries assumed the role of counterparty to the end users of swap agreements, commercial banks, which have traditionally specialized in credit risk evaluation and have the capital reserves necessary to support credit risk management, came to dominate the market for swaps and other OTC derivatives.

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