Pros no interest rate risk liquid fixed term short

This preview shows page 4 - 6 out of 8 pages.

Pros: no interest rate risk, liquid- fixed term/ short term transactions, fixed repo rate, lower transaction cost than selling security o Cons: must trust security dealer or counterpart, higher transaction cost than Tbill 2. You are a government securities dealer, and you find that corporations, money market funds, and even countries, are offering to lend you larger and larger amounts on repo. What problem does this create for running your repo book? How might you solve it? Use the money you have from repos to buy securities, beforehand you were doing repos in order to buy securities- now by them and they money you make will be a carry.
Image of page 4

Subscribe to view the full document.

Could also do reverse repos so your position isn’t long- long positions are problem if interest rates go up. o Hedge by going short in futures so if interest rates do go up, you may make a loss on your long position but gain on the futures – you reduce your exposure to interest rate risk. 3. In what way is what you are doing like being a bank, and in what ways different? What economic function do you perform? How do you make a profit? How do you ensure liquidity? Solvency? You are both financial intermediaries that use leverage and borrow money/securities to lend out money/securities to others. o Banks are making a market in loanable funds, securities dealers are making a market in securities. o Liabilities are like a banks liabilities- they are liquid, safe, offer return. You are different, governments securities dealer does not take deposits. Securities are traded under 3 conventions – same day, next day and forward settlement Same day trades are settled directly between counterparties, other trades are settled either directly or through clearinghouse (GSCC). o Bank loans and checks are cleared through a clearinghouse. Government securities markets do not have as many regulations. What economic function do you preform? Make market, provide liquidity, price discovery, facilitate efficient trades Liquidity comes from inside market – primary dealers can change their inventories. Liquidity also comes from balancing liquidity imbalances with repos and reverse repos. primary dealers required to make active markets in security in good times and bad – ensures degree of liquidity Solvency comes from hedging against your positions and maintaining equity. C. Read “The World Bond Bazaar” (Item 12.1) and “The Changing Nature of Government Debt Markets” (Item 12.2) and answer the following questions: i. How do primary markets for government securities overseas differ from our own? Some foreign governments have fixed prices/coupons of securities, then dishes bonds out using a quota system, often to a syndicate of banks or such institutions to give out these bonds to ultimate investors US has a limit in the auction market, some places don’t o (Britain has an informal limit that they will only enforce if officials expect squeezing to be taking place) Many countries use bid price system where successful bidders pay the price they bid
Image of page 5
Image of page 6

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes