Financial instruments
The following types of transactions have recently become increasingly popular:
Below is a brief explanation of each of them.
For more information, please contact the Members of our Association.
Repo
During 2005, the foundations for the development of the repo market in the Republic of Macedonia were laid by setting the rules for trading and settlement in over-the-counter markets and by drafting a General Repo Agreement, as a unified legal framework for concluding repo transactions between market participants, according to which the conclusion of repo transactions with all short-term securities is envisaged.
The introduction of repo transactions in the Republic of Macedonia began with activities related to laying the foundations of over-the-counter markets, as a competitive framework for trading and settlement of securities with low transaction costs. Trading on over-the-counter markets is based on a quotation system, where the settlement of concluded transactions uses the existing connections between the MIPS payment system, banks and the Central Securities Depository – CDHV, enabling real-time settlement, applying the “delivery versus payment” principle.
What is a repo contract?
The life cycle of a repo agreement involves one party selling a security to another party and simultaneously signing an agreement to repurchase the same security on a specified date at an agreed-upon price. The repurchase price is higher than the original price to reflect the time value of money.
Date of Buying
Buyer (of Sec)
Cash
Sec (Collateral)
Seller (of Sec)
Date of Selling
Buyer (of Sec)
cash + interest
Sec (Collateral)
Seller (of Sec)
Repo operations are a flexible liquidity management tool that allows banks and other financial institutions to borrow funds more cheaply and securely than unsecured (uncollateralized) trading. The flexibility of this tool stems from the ability to quickly and securely convert cash into securities and vice versa.
Forward
A forward exchange agreement is an agreement between a bank and a client to exchange currencies at a fixed exchange rate on a future date.
A forward agreement protects buyers and sellers from fluctuations in the exchange rate and can be adjusted in terms of the amount and time of settlement.
Forward rates are typically calculated using a formula that adjusts the current spot price of the currency pair being traded and the interest rate differential between the two currencies, helping to determine a fair forward price.
The purpose of a forward contract is to lock in an exchange rate between two currencies at a future date in order to minimize currency risk.
This might be done, for example, if a company is contractually obligated to pay a certain amount for a future delivery of goods in a foreign currency and wants to lock in the rate.
Steps to concluding a forward agreement
A forward agreement is an agreement concluded between the bank and the client.
The bank and the client agree upon a forward price, which protects the client from currency risk.
Both parties wait for the agreed date to realiza the transaction.
At the agreed upon date, the forward agreement is executed.
Interest Rate Swap
An interest rate swap is an agreement to exchange interest rates. Under it, both parties periodically pay an amount of interest for its duration. An interest rate swap is practically an exchange of a fixed interest rate for a variable one and vice versa.
The goal is to reduce exposure to interest rate fluctuations and secure a lower interest rate that would not be possible without the use of the interest rate swap.
Under an interest rate swap agreement, one party pays a fixed interest rate and the other a variable interest rate. The variable rate is based on a reference interest rate such as LIBOR or EURIBOR.
A significant feature is that an interest rate swap agreement must be concluded for a period longer than 1 year.