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money_markets.docxThe money market is a place that lenders and borrowers meet to give and receive short term credit to solve liquidity requirements. The instruments in the market have low risk by default and their marketability is high.
The business environment may use these markets to in two ways, they may themselves be selling these instruments in the markets or may be buying the instruments. For the business providing these services they make profits from the interests they receive when a client purchases the instruments. The purchasing businesses participate by acquiring the short term finances to meet their current liabilities and pay an interest which gives a profit to the selling firm.
Government units may use the money markets to either sell or buy financial instruments. A government institution may issue a short term bill to finance its operations or it may sell its bonds to repay the creditors. Institutional investors such as insurance companies are involved in selling and purchasing the financial instruments in the market for a capital gain. They are the real providers of the money that is used to be given to the borrowers. Individuals also behave like institutional investors are involved in buying and selling the instruments for a capital gain.
Roles, functions, and differences
Call markets
Are used to trade instruments that are of one day to fourteen days and they have volatile interest rates and the demand and supply forces affect these markets’ interest rates.the functions of this
Term markets
These are used to trade instruments of a duration of 15 days to one year. The interest rates volatility can be absorbed by the market due to the long durations as compared to call markets.
Interbank market
It is a market that enables banks / non-deposit financial bodies to settle contracts with the central bank and other banks with regard to surpluses and deficits in liquidity.
Primary market
It is where the absorption of money issues and borrowing takes place in order for the borrowers to get new funds through credit forwarded to them.
Secondary market
It is used for varying short term securities by redistributing their ownership, ensuring liquidity and hence increasing the supply of lending amounts as well as reducing the costs of borrowing due to increased supply.
Derivatives market
These are markets for money where by contracts such as forward contracts, call options are traded. They are used to cushion the parties to the contracts against risks that could be faced due to interest or exchange rate fluctuations. The parties enter into a pre agreed rate and depending on the contract they may sell the instruments into their favor.
Reference
Basu, P (2006). Improving Access to Finance for India’s Rural Poor: The World Bank. Washington, D.C.
Bester, H (1987). The role of collateral in credit markets with imperfect information: European Economic Review, 31 (4), pp. 887-899
Goldsmith, R.W. (1969). Financial Structure and Development: Yale University Press, New Haven, CT
Iqbal, F (1988). The determinants of moneylender interest rates: Evidence from India journal of Development Studies, 24(3) pp. 364-378.
