Essay on 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 …show more content…
PV = FV__ (1 + yt)
An increase in y (yield to maturity, or return) will cause the denominator in the fraction to increase, and PV to decrease, as PV is inversely related to the fraction. When PV decreases, more lender (discounter) will be attracted to buy the bill.
After all the analysis, it is recommended that the bank promote on cash product like overnight cash, 7-day cash and loans, and discount security like commercial bills to maximise its profits.
Risk & Obstacles Associated From the Strategies
When endorsing cash products such as overnight cash, 7-day cash, loans and discount securities, there are risks that a bank may face.
One of the risks related would be competition. Competition from other banks will put pressure on a bank to bid lower while forcing higher offer rates, this in turn will minimize the market spread. This mainly involves overnight cash and 7-day cash products.
There is also price risk. This risk is where the interest rate movement will reduce the value of securities held by a trader or dealer. A bank will be affected by market risk if it sets a competitive price should an unexpected increase in market yield occur, as this will drop the value of a bank’s position.
Another risk is the basis risk. This is the