Money Market: An Introduction

Money Market: An Introduction

Prof. Dr AP Faure Rhodes University

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Description

The money market has traditionally been defined as the market for short-term marketable debt instruments, such as commercial paper (CP) and treasury bills (TBs). It is much more than this. It embraces all short-term lending and borrowing, marketable and non-marketable, and includes the significant interbank market. It is in this market that interest rates have their genesis. There are three interbank markets: one where the rate is set administratively by the central bank [the policy or key interest rate (KIR), aka bank rate, discount rate, repo rate, etc], one which does not have a rate (there are exceptions), and the other one where banks compete fiercely among one another for reserves (called federal funds in the US) in order to avoid borrowing from the central bank. The outcome of the latter is the bank-to-bank interbank market (b2b IBM) rate and it closely follows the KIR. All deposit rates follow the KIR and the b2b IBM rate, as does the banks’ prime lending rate (PR, a benchmark rate). PR is the target rate of monetary policy, as money (ie, mainly deposits of the private sector) creation is the outcome of bank credit extension (in the main). Thus, monetary policy is aimed at influencing the demand for credit and its outcome, money creation. This economically-significant process plays out in the money market.

Content

    Context: the financial system
        Learning objectives
        Introduction
        The financial system
        Allied participants in the financial system
        Summary
        Bibliography
   

Overview

        Learning objectives
        Definition
        Primary money market: supply of and demand for short-term funds
        Organisational structure of the money market
        Money (deposit) creation in the money market
        Interbank deposit / loan market
        Money market interest rates
        Money market derivative markets
        International aspects of the money market
        Economics of the money market
        Summary
        Bibliography

 Interbank market & monetary policy

        Learning outcomes
        Introduction
        Bank to central bank interbank market (required reserves) (b2cb IBM)
        Bank to bank interbank market at the final interbank clearing (reserve funds market) (b2b IBM)
        Central bank to bank interbank market (liquidity shortage) (cb2b IBM)
        The money market identity / analysis
        Bank to bank interbank market revisited
        Summary
        Bibliography
  

 Mathematics

        Learning objectives
        Introduction
        Time value of money concept
        Simple interest
        Compound interest
        Broken periods of less than a year (one interest payment)
        Discount
        Effective rate
        Interest-add-on securities
        Discount securities
        Treasury bill tender mathematics
        Bonds with longer than six months to maturity date
        Bibliography

Deposit & debt securities

        Learning objectives
        Introduction
        Money market interest rates
        Deposit securities
        Debt securities
        Summary
        Bibliography

Derivative instruments

        Learning objectives
        Introduction
        Forwards
        Money market interest rate future
        Interest rate swaps
        Options
        Derivatives on derivatives
        Summary
        Bibliography
    Endnotes

About the Author

Alexander Pierre Faure graduated from Elsenburg Agricultural College after school and went on to Stellenbosch University where he graduated with BA (Commerce), Hons BA (Economics), MA (Economics), and PhD (Economics).

He also successfully completed the Stockbroker Examination Requirements at Witwatersrand University (and is a registered Stockbroker - presently non-broking status).

He first worked for the central bank, where he was involved in compiling the monetary statistics (money stock and sources of change, and money market liquidity analysis) and later in the execution of monetary policy.

His career after central banking included private sector banking (the recipient of monetary policy), stockbroking (influenced by monetary policy) and interest rate analysis (reading monetary policy).

After his private sector experience, he became an academic and held the positions Investec Chair in Money and Banking (at Rhodes University and the University of Fort Hare) and Foord Chair in Investments (at Rhodes University).

He is currently at Rhodes University where he teaches financial markets and monetary economics.

He has published widely, including books and papers (his recent papers can be found at: http://ssrn.com/author=1786379).

He also served on a number of boards of directors, holding the positions of Non-executive Director and Managing Director.