Future Market

A market in which contracts are traded for future delivery of commodities (coffee, gold ) , currencies (marks, ponds ) and financial instruments ( Treasury bills, certificates of deposit). The purchase or sale of a futures contract requires that a deposit, called margin, be maintained with a broker. The market is designed in such a way that it is easy to get out of a contract or cancel it.

The vast majority of the participants , the buyers and seller of futures contracts , do not intend to take delivery or deliver , what they bought or sold. Futures contracts are used as an investment vehicles and as a vehicle for hedging positions.

As an example, a manufacturer of gold jewelry who has bought gold on the spot or cash market will sell gold in the futures market until the time when the jewelry is completed and sold in the wholesale or retail market. At that time the manufacturer will buy gold in the futures market. If the price of gold rose in the meantime , he losses on the futures contracts but obtains a higher price for his gold jewelry.

If the price of gold fell down in the meantime . he makes profit on the futures contract but obtain a lower price for his gold jewelry. The sale of a futures contract protected him against fluctuations in the price of gold; however, he never intended to deliver gold under that contract.

Certificate of Deposit. ( CD )

A placement of funds for a certain period of time with a bank for which the depositor of the funds receives a confirmation which makes the deposit receipt a negotiable instrument . Investment bankers create a secondary market where CD’s can be purchased and sold prior to maturity.

Investors usually accept a smaller interest rate on CD’s than on regular time deposits because investment is more liquid , that is, the CD can be converted into cash at any time without asking the bank to break the deposit. CDs were originally invented in the United States in the early sixties and were used in the domestic U.S money market.

They were later also used for external dollar in several financial centers. The technique is so attractive that the instrument has also been introduced into the domestic money market of several other countries .

Effective Interest Rates.

The amount of money , expressed as per annum percentage , actually paid on a loan or deposit. The effective interest rate may differ from the nominal interest rate, depending on interest payment schedule .

For instance , when the interest is deducted from a loan when the load is first made , the actual proceeds available to the borrower are less than the nominal loan principal used to calculate the interest payments. The effective interest rate in this case is the interest payments expressed as a percentage of the actual proceeds on a per annum basis.

Actors in the Foreign Exchange Market

In principle anyone who exchanges currency of a given country for currency of another country participates in the foreign exchange market. However it is useful if we concentrate on the major actors in this market. Under any priority system commercial banks are the main participants in the foreign exchange market. Indeed one can say that it is the commercial banks that “make a market “ in foreign exchange. Next in importance are the large corporations with foreign trade activities or direct investment abroad. Finally central banks are omnipresent in the foreign exchange market.

Commercial Banks.

Obviously when we talk of the commercial bank as the leading actor in the foreign exchange scene we are speaking mostly of large commercial banks with many clients engaging in imports and exports which must be paid for in foreign currencies or of banks which specialize in the financing of trade.

Commercial banks participants in the foreign exchange market as an intermediary for their corporate customers who wish to operate in the market. They also operate on their own account.

Central Banks

These institutions are not only responsible for the printing of domestic currency and the management of the money supply (as well as all the other objectives of monetary policy ) but in addition they are often responsible for maintaining the value of the domestic currency vis-à-vis the foreign currencies. This is certainly true under the system of “fixed exchange rates”. However even within systems of “floating exchange rates “ the central banks have usually felt compelled to intervene in the foreign exchange market at least to maintain “orderly markets”.

What the Foreign Exchange Market is

Like the money market, the foreign exchange market is a market where financial paper with a relatively short maturity is traded. However, the financial paper traded in the foreign exchange market is not all denominated in the same currency. In the foreign exchange market, paper denominated in a given currency is always traded against paper denominated in a given currency is always traded against paper denominated in another currency. One justification for the existence of this market is that nations have decided to keep their sovereign right to have and control their own currency. There would not be a foreign exchange market.

Like the money market, the foreign exchange market considers the time when the transaction is closed to be one of the elements in the market. In describing the money market, we made this point by comparing currency and treasury bill. Currency provides immediate acquisitive power, whereas a treasury bill provides this purchasing power at some specified future date (assuming the bill is held to maturity and not sold in the secondary market). In the foreign exchange market into spot and forward markets. The spot market is for foreign exchange to be delivered within 2 business days; the forward market is for exchange to be delivered at some specified future date. However foreign exchange transactions for immediate delivery or for delivery up to 7 days later are traditionally considered to be spot transactions, although they carry a different rate depending on the specific deliver date. The date of delivery is technically called the value date

Foreign Money Market

Domestic money markets trade in funds denominated in the local currency and operate under regulations governing domestic markets. When funds in any currency are traded outside the regulations governing domestic markets in that currency , then we have a foreign or external money market. This is the case when U S dollar deposits are traded outside the banking regulations governing domestics U.S dollar deposits, usually outside the United States. This type of transaction is the core of the so - called eurodollar market. When speaking of all the currencies traded in foreign markets, one usually refers to them as the Eurocurrency markets; these include Euro – French francs, Euro - German marks, and so on.

We should note, too that in addition to the Eurocurrency markets, foreign money markets have also emerged in Aisa. The Middle East and to a much lesser extent , in other regions. These other markets are often identified by names such as the “ Asian dollar market.” The limitations on the term “Eurodollar market” also apply to terms such as Asian dollar market.”

What the money market is

We begin with the money market because it is the one in which we all have operated at one time or another. Anybody who has a checking account is a participant in the money that one person (or enterprise ) owes to another. In the case of currency , that is cash in your pocket, it is the government that owes the money to you as the bearer of the currency. In the case of a treasury bill it is also the government that owes an equivalent value to the owner of the bill. Here however a specified time has to elapse before the piece of financial paper - the treasury bill – becomes payable in hard cash by the government i.e before the date of the maturity of the document. In the first case , the government currency is actually money. In the second instance, the treasury bill is only near money. It would not be very hard to sell the treasury bill to another person. However the govt itself is not liable for the payment of the money represented by the bill until the instrument matures.

The bulk of the financial assets traded in the money market have a maturity of less than a year. However active trading is carried on in documents of up to 5 years maturity. Anything above 5 years is pretty much the domain of the investors in the capital markets where these longer term securities are traded.market. The article that is bought and sold in this market is “money” or “near – money “. Money or near-money is nothing more than financial paper representing a sum of money