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I have two questions to asked please explain them! Thank you
1) Can you please tell me which money market instruments are Interest-bearing instruments & discount instruments?
2) What is the difference between money market instruments & derivatives?
BPP text states that “Derivatives allow the buyer and seller to agree today to buy or sell an asset at some time in the future at an agreed fixed price”
I don’t understand where is the ASSET in derivatives like Futures, Options, Forward so can we buy or sell asset when there is no asset involved?
Please guide me
All of this is really much more detail than is examinable at Paper FM. It is not until Paper AFM that they are relevant.
Money-market instruments can be either interest bearing or discount instruments. Interest bearing is where money is borrowed and the lender receives interest each year until repayment occurs. Discount instruments are where no interest is paid, but the repayment is more than was originally lent (so for instance bonds with a nominal value of $100 might be issued $90. So the investor only pays $90. They get no interest on their money, but when it comes time for repayment they get repaid $100.
Derivatives are not as described in what you have quoted from BPP. They are traded instruments that get their value (derive their value) from something else. Futures are one type of derivative (and that is what the definition you quote is describing). I explain how currency futures and interest rate futures work in my free lectures on foreign exchange risk management and interest rate risk management, but you cannot be asked for calculation on either in Paper FM (only in Paper AFM).
Sir, I appreciate your previous answer & I’ve watched all your lecture but could you please help me with these too?
1) Can you please tell me which money market instruments are Interest-bearing instruments & which are discount instruments?
2) You said that derivatives get their value from something (but what is that something)?
Is that correct that under Currency Futures & Interest rate Futures they derive their value from Foreign exchange rate in Currency Future & Interest rate in Interest rate Futures?
The more the exchange rate or interest rate fluctuates the more derivatives value change!
Thanks for your time 🙂
1. No. It depends on the specific money market instrument. Bonds are a money market instrument but could be interest bearing or could be discount interments!
2. You have obviously not watched my lectures. As you have written the value of futures is derived from the spot exchange rate or the spot interest rate. As the spot rates change then so too do the futures prices change.
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