Chapter 5 · Other Markets & Investments

Money deposited with a bank, repayable on demand or after an agreed term, typically paying interest. The depositor is a CREDITOR of the bank — not a shareholder.

Instant-access rates are LOWER than fixed-term rates. Depositor "pays" for liquidity via a lower rate. The bank can plan its lending with more certainty if the deposit is locked in for a term, so rewards that with more interest.

Retail bank deposits are protected up to a limit by a government / central-bank scheme:

• UK — FSCS: £85,000 per person per institution
• US — FDIC: $250,000 per depositor per bank
• EU — DGSD: €100,000 per depositor per bank

Deposits ABOVE the limit sit unsecured and can be lost if the bank fails (2008 Northern Rock, 2023 SVB / Credit Suisse). HNW depositors split across institutions to stay within limits.

1. Medium of exchange — used for transactions
2. Store of value — preserves purchasing power (though inflation erodes this)
3. Unit of account — a common measuring stick for prices

Real return = Nominal return − Inflation.

If a deposit pays 3% and inflation is 4%, the real return is −1% — a purchasing-power LOSS even though the balance grows in nominal terms. Cash often delivers negative real returns over long periods. This is the silent killer of long-run cash holdings.

Decentralised, blockchain-based digital assets. NOT issued by any central authority. NOT covered by deposit insurance. Treated by most regulators as ASSETS or SPECULATIVE INSTRUMENTS rather than currency.

Bitcoin: supply hard-capped at 21 million in the protocol. New issuance halves every ~4 years (the "halving").

Stablecoins (USDT / USDC): pegged 1:1 to fiat, backed by reserves. Common on/off ramp for crypto trading.

CBDC (Central Bank Digital Currency): central-bank-issued digital currency (e.g. China's e-CNY, ECB's digital euro exploration). Distinct from decentralised crypto.

The market for short-term debt instruments — typically maturities of 1 YEAR OR LESS. Contrast with the CAPITAL MARKET, which covers longer-term debt and equity.

Short-term government debt (1, 3, 6, or 12 months). ZERO-COUPON — sold at a discount, redeemed at par. Return = par − discounted purchase price.

Example: pay $98.50 for a 3-month $100 T-bill → $1.50 return = ~6% annualised.

Short-term unsecured CORPORATE debt (typically 1–270 days), issued at a discount by large, creditworthy companies + financial institutions. The corporate equivalent of a T-bill.

Risks: credit risk (unsecured) + rollover risk (short-term). CP market froze briefly in 2008 — triggered the Fed's emergency Commercial Paper Funding Facility.

A NEGOTIABLE receipt from a bank for a time deposit — paying interest, fixed maturity, and tradable in the secondary market before maturity.

Difference from a normal fixed-term deposit: CD is TRADABLE. A normal fixed deposit is locked in; access typically means a penalty.

Short-term COLLATERALISED loan. One party sells a security to another with a binding agreement to repurchase it at a slightly higher price later. The difference = the repo rate (implicit interest).

The bonds serve as collateral. Massive market — especially in government bonds — used by banks + institutions for overnight funding.

Pooled fund investing in a portfolio of short-term instruments (T-bills, CDs, CP, repos). Aim: capital preservation + liquidity + a modest return. Used as a cash alternative for short-term liquidity.

Stable NAV historically (typically £1 or $1 per unit). In 2008 the Reserve Primary Fund famously "broke the buck" (NAV fell to $0.97 after Lehman CP defaulted), triggering an MMF run + Fed rescue. Post-crisis MMF rules tightened globally (EU MMFR: CNAV / LVNAV / VNAV categories).

• Tangible asset — you can see and use it
• Rental income + capital growth potential
• Often an inflation hedge over long horizons (rents rise with inflation)
• Low correlation with equities → diversification

• Illiquidity — sales take weeks to months
• Large unit cost — one property is indivisible
• High transaction costs — 5–10% (stamp duty, legal, agent fees) vs ~0.1% for equities
• Maintenance, voids, tenant management
• Concentration risk in a single location

Property investors typically buy with mortgage debt (often 50–80% LTV). A 10% rise in property value can deliver 30%+ equity returns. A 10% fall can wipe out half the equity. Same mechanism, both directions.

Listed closed-ended company that owns and manages income-producing property. Required to distribute a high proportion (typically 90%) of taxable rental income → tax-free at the fund level. Liquid + low-min way to access property. Full treatment in Ch 7 §3.5.

Not marked-to-market on a stock exchange. Institutional property is valued by professional appraisals (RICS Red Book in UK) via three approaches:

1. Comparable sales — recent similar transactions
2. Income (yield) — rent ÷ yield = capital value
3. Cost / replacement — rebuild cost + land

Subjective, updated periodically. Creates "stale price" issues in open-ended property funds.

~$7.5 trillion daily turnover (BIS Triennial Survey 2022). Traded 24 hours across global hubs (Sydney → Tokyo → London → New York). Largely OTC.

Cross-referenced in Ch 1 — same market, same figures.

In "EUR/USD = 1.0850": the FIRST currency (EUR) is the BASE = 1 unit. The SECOND (USD) is the QUOTE / COUNTER currency. "1 EUR buys 1.0850 USD".

The smallest standard price increment in an FX quote. For most pairs: 0.0001 (the 4th decimal). For JPY pairs (e.g. USD/JPY 150.25): 0.01 (the 2nd decimal).

1 pip on EUR/USD on a standard lot ($100k notional) = $10.

Quote example: "EUR/USD bid 1.0848 / offer 1.0852".

• Buy EUR → pay the OFFER (1.0852)
• Sell EUR → receive the BID (1.0848)
• Difference = the SPREAD (4 pips here) — the dealer's margin

Standard settlement: T+2 for most currency pairs.

Exceptions: USD/CAD and USD/MXN settle T+1. (Equities in the US moved to T+1 in 2024; FX is largely still T+2.)

EUR/USD is the world's most-traded pair (~24–25% of daily turnover). Then USD/JPY, GBP/USD. The four "majors" all involve USD on one leg.

USD share of ALL FX trades: ~88% (BIS 2022).

A cross rate is an exchange rate between two NON-USD currencies (e.g. EUR/GBP, GBP/JPY). Historically derived via USD; many now trade directly.

Most FX trading is OVER-THE-COUNTER. Decentralised dealer-intermediated network. Major banks (JPM, Citi, Deutsche Bank, UBS) provide liquidity. Electronic platforms (EBS, Reuters Matching, Currenex). FX FUTURES trade on exchanges (CME), but spot/forward is OTC.

Most GCC currencies are pegged to USD. AED at 3.6725, SAR at 3.75. Hong Kong dollar pegged at 7.80.

Why? Oil exports are USD-priced. USD peg eliminates FX risk between oil revenue and local fiscal outcomes. Trade-off: monetary policy is effectively imported from the Fed — when the Fed hikes, GCC central banks follow.

Exception: KWD (Kuwaiti dinar) is basket-pegged, not USD-only.

An OTC contract to exchange currencies at a specified rate on a future date BEYOND the spot value date. Used to lock in exchange rates for future cashflows — eliminates FX risk. Bespoke maturities (1m, 3m, 6m most common).

Forward = Spot × (1 + quote-currency rate) ÷ (1 + base-currency rate).

The forward rate is determined by the INTEREST RATE DIFFERENTIAL between the two currencies. If it weren't, risk-free arbitrage would be possible.

If the BASE currency has a HIGHER interest rate than the quote currency, the base trades at a forward DISCOUNT (fewer quote units per base at the forward date).

If BASE has a LOWER rate, the base trades at a forward PREMIUM.

US exporter expecting to receive €1m in 3 months' time. Wants to lock in the USD value.

Enters a 3-month FORWARD to SELL EUR and BUY USD at a rate locked in today. Removes FX uncertainty. Also removes upside if EUR strengthens — trade-off: certainty for opportunity cost.

A spot trade combined with a SIMULTANEOUS opposite-direction forward — effectively a temporary exchange of currencies. Used by banks + institutions to manage short-term FX funding without taking outright FX risk.