exercise on standard tender procedure

Standard tender procedure
Instituciones e instrumentos financieros

Beatriz Sanz 3ºA

1

CHAPTER 3 – THE ROLE OF THE CENTRAL
BANK
Instituciones e instrumentos financieros
Grado en ADE
LIQUIDITY-PROVIDING
REVERSE
VARIABLE RATE TENDER

TRANSACTION

BY

The ECB wants to provide liquidity to the system through an open market operation, this is for instance a main refinancing operation, MRO, with a variable rate tender, so the bids with the highest interest rates have to be satisfied first, followed by bids with successively lower rates, until the total amount of liquidity is distributed.
DATA

BANK 1

INT. RATE
3.1 %
3.09 %
3.08 %
3.07 %
3.06 %
3.05 %
3.04 %
3.03 %

MILLIONS
15
15
10
15
15

BANK 2

INT. RATE
3.1 %
3.09 %
3.08 %
3.07 %
3.06 %
3.05 %
3.04 %
3.03 %

MILLIONS
10
10
10
10
5
10
5

BANK 3

INT. RATE
3.1 %
3.09 %
3.08 %
3.07 %
3.06 %
3.05 %
3.04 %
3.03 %

MILLIONS
5
10
15
15
5
10

BANK 4

So we are going to start with the banks that have asked for bids with an interest rate of
3.1%, these are the Bank 2 and the Bank 3. We distribute 10 and 5 million respectively.
We still have 91 million left so we continue with the bids with a 3.09% interest rate, these are the bids made by Banks 2 and 4, we give 10 million each so we have already distribute 35 millions and we have still 71 millions left.

INT. RATE
3.1 %
3.09 %
3.08 %
3.07 %
3.06 %
3.05 %
3.04 %
3.03 %

MILLIONS
10
5
-

We followed this method until we have to attend to 3.06 % bids. We have a problem then because we have to dispense 40 millions and we have only 26 millions left so we are going to be able to give the 65% of the total amount required. We use this percentage to estimate the proportional part of that 26 millions that each bank is going to receive.
So the bank 1 is going to receive 9.75 million, Bank 2, 3.25 and successively.
This is the final distribution of the total transaction.