The fixed quote government bonds in the Euro MTS markets were non dynamic bonds which had a fixed rate of return on them as quoted by the government. This made them a highly stable investment for the customers as despite the market conditions the bond would respond with a stable or the same rate of return making it a very steady source of revenue for customers. However the fixed quote nature of the bonds also exposed them to the market risks of dynamic interest rates and rates of return on monetary instruments. The fixed quote was non risky when the rates were down in the market however when the market rates increased in comparison to the Euro MTS then the Euro MTS were a loss making and non profitable investment as they were providing lesser rates of returns. This was the largest risk that was faced by the Euro MTS market in the case of the CITIBANK EMTS scandal.
The best way to hedge against this risk is to make the rates floating as per the market rates. Moreover a risk premium rate can also be asked by the sellers and the traders in the fixed quote bind market in order to hedge against the risks of dynamically changing rates in the market. However when discrepancies like a large number of bonds floating in the market occur it is difficult to hedge against the market risk as the entire stock and bond market is effected resulting in the lowering of prices and quotes for the bonds. Citibank could have gone ahead and kept on trading in futures contracts however on a very large scale this would have alerted the market of the large prospective sales of the bonds resulting in a catastrophic and frenzy market. In such conditions Citibank would not have been able to make as much profit on its sales as it did.
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