Finance and Financial Markets

Third Edition

by Keith Pilbeam

Chapter 5 - Domestic and International Money Markets

Find an overview and useful learning resources below to accompany Finance and Financial Markets chapter five.

Chapter Introduction

Money market instruments are defined as securities that when issued have a year or less to maturity, and the market that trades in such instruments is known as the money market. Examples of money market instruments are Treasury bills, commercial paper, bankers’ acceptances, certificates of deposit and Eurocurrency deposits. The money market is important because many of these instruments are held by banks as part of their eligible reserves, that is, they may be used (are eligible) as collateral if a bank wishes to raise funds from the central bank. The money market is itself divided into two interrelated parts, the domestic money market and the international money market. The domestic market deals with short-term domestic currency deposits that are held in the country of issue. The international money market consists of national currencies that are held on short-term deposit in countries other than the country of issue of that currency. The international money market is referred to as the off shore market or Eurocurrency market.

Learning Objectives

In this chapter you will learn about:

  • ​Treasury bills and the relationship between Treasury bill prices and short-term rates of interest
  • Various other short-term securities such as commercial bills, certificates of deposit, repurchase agreements (repos) and bankers acceptances
  • The history of the Eurodollar market and reasons for its continued growth
  • The importance of dollar LIBOR ($LIBOR) to the interbank market
  • Note issuing facilities, Euro commercial paper and Euro medium-term notes

Further Reading

Buckle, M. and Thompson, J. (2004) The UK Financial System: Theory and Practice, 3rd edn, Manchester University Press.

Fabozzi, F., Mann, S. and Choudhury, M. (2002) The Global Money Markets, Wiley.

Miller, R. and Van Hoose, D. (2003) Money Banking and Financial Markets, 2nd edn, South Western College Publications.

Stigum, M. and Crescenzi A. (2007) Stigum’s Money Market, 4th edn, McGraw Hill.

Revision Questions

  1. ​Discuss the various methods by which a central bank might sell its Treasury bills to financial institutions and investors.
  2. Explain what is meant by LIBOR and why it is such a pivotal rate of interest in the financial markets. Discuss the extent to which LIBOR will be affected by changes in dollar Treasury bill interest rates.
  3. Explain what is meant by the TED spread. What does a rise in the TED spread signify on the interbank market?
  4. Explain what is meant by a Eurodollar. Discuss the historical development of the Eurodollar market and the extent to which regulation played a role in its development.
  5. Explain why Eurobanks based in London can offer more competitive deposit and loan rates on dollars than US-based banks.
  6. Discuss the ways in which a Eurobank differs from a normal commercial bank.
  7. Is Eurobanking activity a threat to the world financial system or does it provide much needed services?

Multiple Choice Questions

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