2. MÉTODOS
2.8 Indicadores de mortalidad atribuible a alcohol
Money market instruments
Money market calculations
Discount instruments
CDs paying more than one coupon
Exercises
OVERVIEW
The “money market” is the term used to include all short-term financial instruments which are based on an interest rate (whether the interest rate is actually paid or just implied in the way the instrument is priced).
The underlying instruments are essentially those used by one party (bor-rower, seller or issuer) to borrow and by the other party to lend (the lender, buyer or investor). The main such instruments are:
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Treasury bill – borrowing by government.•
Time depositborrowing by banks.
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Certificate of deposit (CD)•
Commercial paper (CP) – borrowing by companies (or in some cases, banks).•
Bill of exchange – borrowing by companies.Each of these instruments represents an obligation on the borrower to repay the amount borrowed at maturity, plus interest if appropriate. As well as these underlying borrowing instruments, there are other money market instruments which are linked to these, or at least to the same interest rate structure, but which are not direct obligations on the issuer in the same way:
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Repurchase agreement – used to borrow short-term but using another instrument (such as a bond) as collateral.•
Futures contract used to trade or hedge short-term•
Forward rate agreement (FRA) interest rates for future periods.The money market is linked to other markets through arbitrage mecha-nisms. Arbitrage occurs when it is possible to achieve the same result in terms of position and risk through two alternative mechanisms which have a slightly different price; the arbitrage involves achieving the result via the cheaper method and simultaneously reversing the position via the more expensive method – thereby locking in a profit which is free from market risk (although still probably subject to credit risk). For example, if I can buy one instrument cheaply and simultaneously sell at a higher price another instrument or combination of instruments which has identical characteristics, I am arbitraging. In a completely free market with no other price considerations involved, the supply and demand effect of arbitrage tends to drive the two prices together.
For example, the money market is linked in this way to the forward for-eign exchange market, through the theoretical ability to create synthetic deposits in one currency, by using foreign exchange deals combined with money market instruments. Similarly, it is linked to the capital markets (long-term financial instruments) through the ability to create longer-term instruments from a series of short-term instruments (such as a 2-year swap from a series of 3-month FRAs).
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Eurocurrency Historically, the term “Euro” has been used to describe any instrument which is held outside the country whose currency is involved.
The term does not imply “European” specifically. For example, a ster-ling deposit made by a UK resident in London is domestic sterster-ling, but a sterling deposit made in New York is Eurosterling. Similarly, US dollar commercial paper issued outside the USA is Eurocommercial paper while US dollar commercial paper issued inside the USA is domestic commer-cial paper. Confusingly, this term has nothing whatever to do with the proposed European Union currency also called “euro.”
Coupon / yield A certificate of deposit pays interest at maturity as well as repaying the principal. For example, a CD might be issued with a face value of £1 million which is repaid on maturity together with interest of, say, 10 percent calculated on the number of days between issue and maturity. The 10 percent interest rate is called the “coupon.” The coupon is fixed once the CD is issued. This should not be confused with the “yield,” which is the current rate available in the market when buying and selling an instrument, and varies continually.
Discount 1. An instrument which does not carry a coupon is a “discount”
instrument. Because there is no interest paid on the principal, a buyer will only ever buy it for less than its face value – that is “at a discount” (unless yields are negative!). For example, all treasury bills are discount instruments.
2. The word “discount” is also used in the very specialized context of a “discount rate” quoted in the US and UK markets on certain instru-ments. This is explained in detail below.
Bearer / registered A “bearer” security is one where the issuer pays the prin-cipal (and coupon if there is one) to whoever is holding the security at maturity. This enables the security to be held anonymously. A “regis-tered” security, by contrast, is one where the owner is considered to be whoever is registered centrally as the owner; this registration is changed each time the security changes hands.
LIBOR “LIBOR” means “London interbank offered rate” – the interest rate at which one London bank offers money to another London bank of top creditworthiness as a cash deposit. LIBID means “London inter-bank bid rate” – the interest rate at which one London inter-bank of top creditworthiness bids for money as a cash deposit from another. LIBOR is therefore always the higher side of a two-sided interest rate quotation (which is quoted high–low in some markets and low–high in others).
LIMEAN is the average between the two sides. In practice, the offered rate for a particular currency at any moment is generally no different in London from any other major centre. LIBOR is therefore often just shorthand for “offered interest rate.”
Specifically, however, LIBOR also means the average offered rate quoted by a group of banks at a particular time (in London, usually 11:00 am) for a particular currency, which can be used as a benchmark
Terminology
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