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The money market allows for the adjustment of the treasury when cash flows temporarily fail exceeding or lacking compared to ordinary needs. The company or intermediary can then employ or collect funds for short periods, with highly standardized and highly negotiable instruments.
Typical issuers. Treasury, banks, companies with adequate creditworthiness.
Typical investors. Banks, businesses, families (directly or through intermediaries).
Function. Cover temporary cash mismatches and optimize working capital management.
Public debt management instrument, bearer/dematerialized security, issued below par. The yield is given by the difference between the redemption value and the issue/purchase price.
\[ R_{BOT} = N - P_0,\qquad r_{BOT}=\frac{N-P_0}{P_0}\cdot\frac{365}{T} \]
In your notes, 12% tax is indicated; in the current Italian framework, government bonds apply generally a preferential rate of 12.5%.
In the portfolio they are used as liquidity parking and risk-free basis for short-distance pricing.
Discount issue: yield given by the difference between the redemption price and the issue price.
\[ r_{CF}=\frac{N-P_0}{P_0}\cdot\frac{365}{T} \]
In your notes: income taxation at 26%.
Subjects: drawer (issuing debtor) and beneficiary. The security must contain amount, beneficiary, date/expiry, location and signature of the issuer.
Transfer by endorsement/endosso (often with a "no guarantee" clause in the operative notes). Upon maturity, the beneficiary requests payment from the shooter; in case of non-payment they can take recourse actions.
In your notes, the promissory note recalls specific fields: amount, beneficiary name, issue date, city/place, expiry date and payment statement.
The beneficiary can transfer the bill of exchange to the bank before maturity, obtaining immediate liquidity net of commissions/discount interest.
\[ \text{Net Proceeds} \approx N - N\cdot r_s\frac{T_{res}}{360} - Fee \]
where \(r_s\) is the discount rate applied by the bank.
In your notes: letter/acknowledgment of debt with commitment to pay, often supported by surety banking; maximum indicated duration of 3 months.
\[ \text{Amount at Maturity} = Principal + Interest \]
Business: flexibility in short-term working capital.
Investor/supplier: greater security thanks to banking support.
Bank/financial company: income from interest and commissions.
Acceptance credit through which the bank, by accepting the bill, assumes the role of principal obligor; instrument negotiable on the money market, typically with a term of up to 3 months.
They are frequent in international commercial operations and documentary credit.
Buyer/debtor: requires payment time.
Supplier: issues an invoice and proposes settlement via bank acceptance.
Bank: accepts the bill; the supplier can discount it before maturity.
In documentary credit operations, payment occurs upon presentation of documents; at maturity the buyer reimburses the bank (or supplier, depending on the contractual structure).
In your notes: for nominative certificates the protection of the interbank fund can be invoked within 100,000 euros according to applicable conditions.
Investment with a fixed maturity: early disinvestment depends on marketability and price market, not by "on sight" extinction of the constraint.
Typical duration in your notes: 15 days - 6 months.
\[ i_{PCT} = \frac{P_{term}-P_{spot}}{P_{spot}}\cdot\frac{360}{T} \]
Use: customer/saver buys spot from the bank and resells forward. Financing: firm sells securities spot and repurchases them forward obtaining cash.
Typical participants: families, businesses, financial intermediaries.
The spot price is negotiated between the parties (usually close to the market price of the security).
On zero-coupon securities the forward price is normally higher than the spot price. On bonds with a coupon, the differential also depends on the coupon detachment in the period.
The money market is the first channel through which the central bank's decisions are reflected in prices of liquidity in the system. The efficiency of this segment affects the stability of payments, the cost of credit and the shape of the yield curve on short maturities.
Operational definition. Interbank loans without collateral; the price incorporates pure counterparty risk in addition to the expected monetary stance.
Voltage indicator. The differential with the secured and a rapid signal of stress:
\[ Basis_{u-s}=i_{unsec}-i_{repo} \]
A persistent increase indicates higher credit risk premium among banks.
Operational definition. Collateralized funding with temporary transfer of title. It reduces counterparty risk but introduces collateral risk and haircut risk.
General collateral vs special. In the "special" segment the repo rate can drop below the GC rate due to lack of the requested qualification.
\[ Specialness = i_{GC} - i_{special} \]
High values reflect strong technical demand for a specific collateral.
Primary. The issue price and the initial cost of funding are formed. Secondary. The price is continuously updated on flows, news macros and policy expectations.
The difference between market return and auction return signals immediate repricing of risk:
\[ \Delta y_{post} = y_{mkt} - y_{auction} \]
\(\Delta y_{post}>0\) indicates worsening of perceived conditions after placement.
Operational levers. Refinancing operations, standing facilities and remuneration of reserves define the reference level of overnight rates.
Transmission. When excess liquidity is large, the system tends to "floor" regime and \(i_{ON}\) gravitates close to the deposit rate.
\[ i_{ON} \approx i_{deposit} + \varepsilon_t,\qquad \varepsilon_t\to 0 \text{ con eccesso di riserve} \]
Operational frictions and liquidity segmentation determine the residual deviation \(\varepsilon_t\).
In simplified form, the overnight market rate tends to move within a corridor:
\[ i_{deposit} \le i_{ON} \le i_{lending} \]
The actual size depends on reserve distribution, collateralization costs and frictions microstructural structures between intermediaries.
Forward rates reflect expectations about overnight futures plus a risk/liquidity premium:
\[ i_{t,T} \approx \frac{1}{T-t}\sum_{k=t}^{T-1}\mathbb{E}_t[i_{ON,k}] + \pi_{t,T} \]
with \(\pi_{t,T}\) premium for risk, liquidity and policy uncertainty. In practice, \(\pi_{t,T}\) increases in phases of macro volatility or funding stress.
Between two contiguous expiries, the implicit forward is:
\[ (1+r_{0,T_2}\tau_{0,T_2}) = (1+r_{0,T_1}\tau_{0,T_1})\,(1+f_{T_1,T_2}\tau_{T_1,T_2}) \]
where \(\tau\) are year fractions according to the day-count convention adopted. Key relationship for inferring implicit forwards and policy expectations from spot prices.
In adverse phases, the spread between unsecured and secured widens. A summary measure:
\[ Spread_{stress} = i_{unsec} - i_{repo} \]
Qualitative decomposition:
\[ Spread_{stress}\approx Premium_{counterparty}+Premium_{liquidity} \]
A persistent increase signals deterioration in confidence, lower fungibility of liquidity and higher marginal cost of non-collateralized funding.