Index participation units and the performance of index futures markets: Evidence from the Toronto 35 index participation units market , Park, T.
Index participation units and the performance of index futures markets: Evidence from the Toronto 35 index participation units market. The Journal of Futures Markets , 15 2 , A directional analysis of the Bureau for Economic Research's quarterly forecasts. Journal of Financial Research , 36 2 , I find that three and sixmonth negotiable certificate of deposit CD , Eurodollar deposit ED , and banker's acceptance BA yields are also affected by yearend liquidity preferences.
Two and threemonth financial commercial paper CP yield changes are less pronounced. Banks and institutional investors trade banker's acceptances on the secondary market before they reach maturity. The strategy is similar to that used in trading zero-coupon bonds. The BA is sold below face value, at a discount determined by the length of time before the maturity date.
Banker's acceptances are considered to be relatively safe investments because the bank and the borrower are liable for the amount that is due when the instrument matures.
This gives the seller assurances related to payment. Meanwhile, buyers are afforded the ability to make purchases in a timely manner and not worry about having to make payments in advance. Now, the key risk is that the financial institution will have to make good on the promised payment. This is the key risk for the bank.
To help hedge against this, the bank may require the buyer to post collateral. The exporter wants assurance of payment, but the importer also wants assurance that the seller can deliver. Banker's acceptances are money market instruments and, like most money markets, are relatively safe and liquid, particularly when the paying bank enjoys a strong credit rating. Commercial paper is a promissory note that pays a fixed rate.
Commercial paper is generally used to cover short-term obligations such as the cost for a new project or short-term receivables. BAs are also short-term promissory notes, although they have the unconditional guarantee of a bank and are often used for trade. For importers and exporters, BAs help boost trade by reducing transaction-related risks. Federal Reserve Bank of New York. Loan Basics. Alternative Investments. Treasury Bonds.
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Your Practice. Popular Courses. Table of Contents Expand. Understanding Banker's Acceptance. Advantages and Disadvantages of BAs. The Bottom Line. It is also known as a bill of exchange. It comes with additional features of being marketable security.
Hence, it can also be used as an investment tool by investors. It guarantees a future payment to the beneficiary at a specific date. It is often used in international trade. It eliminates the trust deficit between counterparties in international trade. The bank appraises the credit profile of the applicant. The importer can then forward the BA to the exporter. The maturity date of the BA is set from 30 days to days depending on the needs of the importer. Once the exporter receives this financial instrument, it can proceed with the order manufacturing.
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