Tutorial 2

Review Questions – Chapter 1

1. Which are the three largest financial centres and what are the major global financial markets?

3 largest financial centres:-London, New York and Tokyo

3 major global financial markets: -

Asian- Tokyo, Sydney, Hong Kong, Singapore, Shanghai, Kuala Lumpur

European- London, Frankfurt, Zurich, Paris, Luxembourg

North American- New York, L.A., San Francisco, Montreal

2. Discuss the four major areas of a bank’s money market operation.

Money market operations – Wholesale market for short-term, high-quality debt instruments
traded over the counter and through ETP’s

4 Major areas of money market operations:-

i) Trading in short-term “offshore” or Eurodeposits and domestic deposits

Eurodeposits – currencies other than domestic deposits (Euro, USD, JPY, CHF etc)

Domestic deposits – MYR, subject to SRR

ii) Trading in short-term debt instruments such as Treasury Bills, NCD’s, CP’s, trade bills
and BA’s

Buy and Sell papers on an outright or repo basis through dealers and brokers in the
primary and secondary market

iii) Trading in FX swaps

Forex swap and swap funding, banks indirectly borrow and lend one currency for
another.

iv) Trading in short-term interest rates derivatives

Short-term interest rate derivatives such as FRA’s, financial futures and options, Interest
rate swaps.For trading, arbitraging and ALM.

7. Exit Bank purchased MYR 5,000,000 bankers acceptance for 90 days at a discount of 6.80% p.a.
 a) Is Exit Bank borrowing or lending the MYR 5,000,000

Lend (Buy /Purchase BA’s)

Bankers acceptance is an order by the drawer to the bank to pay a specified sum of money
on a specified date to a named person or to the bearer of the draft. Upon acceptance,
which occurs when an authorized bank accepts and signs it, the draft becomes a primary
and unconditional liability of the bank. If the bank is well known and enjoys a good
reputation, the accepted draft may be readily sold in an active market. A banker's
acceptance is also a money market instrument – a short-term discount instrument that
usually arises in the course of international trade (wikipedia definition)

b) Compute the discounted amount of this transaction

Discounted proceeds = MYR 5 mil (1-(6.8 X 90 / 36500))

= MYR 4,916,164.38

c) What is the effective yield of this banker’s acceptance to Exit Bank?

Effective yield = MYR 5,000,000 X 6.8 / MYR 4,916,164.38 = 6.916%

Review Questions – Chapter 2

3. Highlight some of the important features of a Eurocurrency.

Eurocurrency deposit is a deposit traded outside the home country.

For example, a Eurodollar deposit is a US deposit traded outside the US

i) Trading in deposit must be unregulated

ii) There are no reserve requirements imposed on Eurodeposits
iii) Eurodeposits are predominantly short-term interbank deposits with maturities from one
day to one year
iv) Inter-bank Eurodeposit transactions are mainly on a clean basis – no collateral

7. You called 3 banks to request for 3-month Ringgit deposits for which they quoted:

Bank A : 7.2000 - .3000%

Bank B : 7.1500 - .2500%

Bank C : 7.1800 - .2800%

i) If you are a borrower, which bank will you borrow from and at what rate?

Bank B - 7.2500% - lowest borrowing rate

ii) If you are a lender, which bank will you lend to and at what rate?
Bank A – 7.2000% - highest lending rate