Money Market Trading Strategies

862 WordsSep 3, 20084 Pages
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…
Information asymmetry Other risks may include information asymmetry. This is a situation where dealers may anticipate and forecast yield movement better because of information data that they can access but which the bank does not have. Bank-Accepted Bills: Acceptor’s Risk The primary liability to exchange the bill at maturity falls upon the acceptor; therefore, the bank has the ultimate responsibility to honour the bill at maturity. It carries the risk that the drawer may not comply with the associated financial agreement to pay the bank the face value of the bill at maturity. Difficulty to Cancel or Alter Once a forward cash contract is entered, its commitment may be difficult to cancel or alter. This limits the bank to retreat from the contract if the terms appear unfavorable in the future. Conclusion The report shows that interest rates have been increasing since January 2005 due to the rise in the economic growth rate in Australia. According to the analysis the market interest rate is expected to increase in the next 6 months due to various factors such as economic growth, inflation and increase in commodity prices. Based on this prediction, various strategies can be used to hedge interest rate risks and maximize profits of the bank. The bank can make its decisions based on the viability of the strategies considering the possible risks and obstacles that the bank may
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