Answer to Question #189490 in Management for neha

Question

. Explain different types of money market instruments. In each of the below cases, which

money market instruments would you recommend and why?

 

a. A mutual fund manager has INR 450 million of cash, which he needs to park for a period

of less than 180 days, where he will move this to equity

 

b. An oil refining company wishes to borrow INR 1500 million for a period of 90 days to

fund its settlement of invoices

Answer 1

First, a promissory note; is a financial instrument with a written promise by one party to pay another party a definite sum of money by demand or at a specified future date. However, it falls in due for payment after 90 days within three days of grace. Second, the Central Government issues the treasury bills, and they come with different maturity periods like one year, six months, or three months. Third, banker’s Acceptance; is used in money market funds and will specify the details of repayment like the date of repayment, amount to be paid, and details of the individual to which the repayment is due. It features maturity periods that range between 30 days up to 180 days.

Fourth, Repurchase agreements; are loans of short duration which buyers and sellers agree to sell and repurchase. Fifth, Commercial papers; usually have a fixed maturity period which can range anywhere from 1 day up to 270 days.

a) I recommend bankers acceptance; because it features maturity periods ranging between 30days up to 180 days.

b) I recommend promissory note because it is a financial instrument with a written promise by one party to pay another party a definite sum of money by demand or at a specified future date, although it falls in due for payment after 90 days within three days of grace.