Money market trading strategies
Looking at the prediction made, i.e. the money market interest rate will increase for the next six months, the team has come out with a few strategies to be undertaken in order to maximise the bank’s profit.
The first instrument will be of the cash products, including overnight cash, 7-day cash and loan, and secondly, the discount security which consists commercial bills.
1. Overnight & 7-day Cash
The bank can offer to take overnight deposits or make overnight loans to big corporations, making use of the increasing interest rate for the next six months. High interest rate will attract corporations who have some amount of money which is unused to be parked somewhere to at least generate some profit, to invest the deposit in the bank. This will give them some yield of say, 0.0178% per day (6.5% per annum). Therefore, a deposit of $5 million will give them a return of $1,780.
Likewise, corporations who need an overnight loan will also go to the bank for some funds. The bank’s strategy is to know which price other banks are offering to the client. The two prices quoted by a bank will determine the lending and investing rate of clients. Therefore, if the common quote is 6.50-65, our bank can narrow down spread, with quote of say 6.50-62. Though it gives lesser profit, it attracts more clients who are savvy with the market condition.
7-day cash gives the same yield. The only difference is the period of the deposit and loan, which is a fixed period of 7 days.
2. Loan (fully-drawn advance)
There are two types of short-term loan; committed loans and uncommitted loans. The bank can concentrate more on the committed loans, as it has commitment fee payable. An increase in interest rate will then increase the profit of the bank issuing loan to corporations.
3. Commercial Bills (Bills of exchange)
The bank can issue commercial bills; or rather bank accepted bills (BAB), where the bank acts as the acceptor of the bill and...
Please join StudyMode to read the full document