Presented ByMuhammad Khaliq –Uz-

Zaman

Academic Background: BBA &MBA from Bahria University. Professional Qualification: CFA Level I Exam. ACI Certified Treasury Dealer. JAIBP from Institute of Bankers Pakistan. Prospective Qualification: MS Economics From IBA

What is treasury? What is Money Market? Money Market Classification. Money Market Instruments. Money Market Transaction. Tools for Monetary Management.

It is the department of any Bank or a financial institution which performs duty of

Fund Management Asset and Liability Management

The money market (“MM”) is a wholesale market for low risk, highly liquid, short-term debt instruments

It serves as an avenue through which banks and financial institutions can offload their excess liquidity or meet their short-term funding requirements.

To the government an organized MM represents a means for it to implement it’s monetary policies in an efficient manner. Moreover, it provides it with a liquid market for securities through which it can finance it’s own borrowing requirements.

Primary Market

Secondary Market

The primary market constitutes the government of Pakistan selling its securities through the State Bank of Pakistan by carrying out auctions

Through these auctions the government invites bids for its Treasury Bills in fixed tenors of 3, 6 and 12 months and Pakistan Investment bonds in 3, 5,7, 10, 15 and 20 Years

A pre-auction target is announced in advance.(Quarterly Targets for T-Bills and Half yearly for PIB’s)

All GoP securities are issued to Primary Dealers (PD) appointed by the State Bank only.

The securities issued in the primary market are then traded in the secondary market, which constitutes the various financial institutions trading among themselves through brokers or directly

The securities once sold to the PDs may be bought by non-PD banks,Corporates,MM Mutual Funds, Pension Funds, Insurance Companies etc in the secondary markets

The two markets are linked in the sense that the rates at which bids are accepted in the auction have a direct bearing on the rates prevailing in the secondary market.

Treasury Bills. Pakistan Investment Bonds (PIB’s). Term Finance Certificates. GOP Ijarah Sukuk.

They are zero-coupon bonds issued at a discount, have a par value of Rs 100 and a maturity of three, six or twelve months.

T-Bills are short term securities issued by the State Bank on behalf of the Ministry of Finance through auctions or OMOs (Open Market Operations).

Price = _____100________ (1+ __i__*DTM)

365 DTM=Days to Maturity i= Interest rate

The price of T-bill with 84 days to maturity and currently trading at 13.15% in MM

= _______100________ (1+13.15/36500*84)

= 97.06

o Measurement of Interest rates Interest rate can be defined as price of credit or return to capital.

Interest rate can be measured through:I. Yield to Maturity (YTM) – this equalizes current market value of a

loan or security with the expected future income such loan could generate. The YTM is calculated as :

nn

n

tt

t

YTM

V

YTM

CFEPV

)1()1(

)(

1

Or

n

tn

ntt

I

FV

I

PmtPV

1 )1()1( (1)

Where

PV = current market value of asset

CF = expected cash flow

FV = Expected value of asset at maturity

I = market interest rate

YTM = the yield to maturity

II. Bank discount rate (DR) – the rate usually quoted on short- term loans and government securities. This calculated as: DR = 100 – Purchase price of loan or security

100X 360(2) Number of days to maturity

III. YTM equivalent – this is a means of converting DR to YTM and it is calculated as: YTM (100 – Purchase price) 365

equivalent = Purchase price X Days to maturity

yield(3)

The Most Dangerous MM Instrument . Pakistan Investment Bonds (“PIB”) were

launched in December 2000 to replace FIBs PIBs are issued in five tenors; 3Y, 5Y,7Y, 10Y,

15Y, 20Y and 30Y. The current coupons rates are 11.25%,

11.50%, 11.75%, 12.00%,12.50%,12.75% and 13% respectively.

Term Finance Certificates are redeemable capital instruments and may be issued by a company directly to the general public, which also includes institutions.

Unlike straight bonds, they are redeemable capital and are of long tenors i.e. more than one year. They are quoted on a price basis rather than yield to maturity.

Earnings from TFCs are taxable @10% (Withholding tax as per the Income Tax Ordinance and zakat is deducted @2.50%.

Repo Transaction. Call/Clean Transaction COI Transaction.

Repurchase Agreements (“Repos”) are basically a means of raising funds by selling government approved securities at a fixed rate, with the intention of repurchasing them at a specified future date.

For the party selling the security (borrower of funds) the transaction is referred to as a repo whereas for the party purchasing it (lender of funds), the transaction is referred to as a reverse repo.

Repo Transaction ranges from O/N (i.e. One Day) to 1 Year.

Example:

Bank A needs to borrow Rs 1 billion for 3days (i.e. from 7 jan-2011 to 10 Jan -2011).Bank A have a 3 months t-bill issued on 30-12-2010 and mature on 24-3-2011.The three day price quoted to Bank A for repo is13/13.25.

Find the first price and second price ? Find the first Amount And Second Amount? First Amount is the amount Bank A receive today and

Second Amount is the Amount Bank A pays at maturity.

PKRV RATES Slab Bid 0-7 12.73 15-Aug 12.83 16-30 12.90 31-60 13.08 61-90 13.21 91-120 13.3 121-180 13.38 181-270 13.52 271-365 13.69 2 YEARS 13.98 3 YEARS 14.21 4 YEARS 14.22

5 YEARS 14.25 6 YEARS 14.27 7 YEARS 14.33 8 YEARS 14.1 9 YEARS 14.14 10 YEARS 14.31 15 YEARS 14.56 20 YEARS 14.76 30 YEARS 14.93

Now Calculate first price:DTM:76 PKRV for 76 DTM=13.21% First Price = 100 (1+ 13.21 *76) 36500

= 97.3230 Second Price = FP*(1+ROR/365*No. of

days) = 97.3230* (1+ 13.25 *3)

36500 Second Price = 97.4290

First Amount = face Value *FP/100 = 1,000,000,000 *

97.3230 100

= 973,230,000 Second Amount = Face Value * SP/100

=1,000,000,000*97.4290/100 = 974,290,000

Call transactions consist of non-collateralized lending/borrowing of PKR funds.

All Call/Clean transactions take place on the basis of line limits between banks and NBFIs. i.e. each institution has an internal limit placing/recieveing a cap on the line exposure.

Bank Bank “CALL”

Bank/ NBFIs “Clean” NBFI

It is similar in nature to the Clean Transaction.

Borrower issues a Certificate of Investment to the Lender.

COI holds no value in the market and only the issuing bank can redeem it.

1. OPEN MARKET OPERATION. 2. DISCOUNT RATE/REPO RATE. 3.SLR & CRR .

The SLR is an indirect tool of monetary control used by the State Bank of Pakistan.

18% of Demand Time Liability for Commercial Banks and 15% for Development Financial Institutions.

T-bills and PIB’s are maintained with the SBP.

Another tool of monetary control with the central bank.

Cash reserve is maintained with the SBP. 5% of the Demand Liability for

Commercial Banks and 1% for Development Financial Institutions.

Active market players include:

National Bank of Pakistan United Bank SCB Citibank NIB