The Global Money Markets and Money Management
p align="left">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.
