2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16
The money market is a key link in the system of funds turnover, due to which the mechanisms of distribution and redistribution of cash flows in the economy can work. The migration of funds between different entities is ongoing, it arises due to the presence of supply and demand for funds.
Theoretical foundations
Money market is divided into several categories. These are the currency, interbank and accounting markets. There is also a derivatives market.
The discount market includes commercial and treasury bills and other money market securities (other short-term liabilities). It turns out that in the accounting market there is a turnover of a huge mass of short-term securities. Their main parameter is mobility and high liquidity.
The interbank market is part of the loan capital market. Here, the funds of credit institutions that are temporarily free are used by banks among themselves. Typically, this is organized in the form of a short-term interbank deposit. Mostdeposits for 1, 3 or 6 months are common, and the deadlines are 1-2 years, but sometimes the term can be increased to 5 years. The funds circulating in the interbank market can also be used by banks for active operations for the medium or long term. They can also use these funds to regulate balances. Another way to use it is to comply with government regulatory requirements.
Currency markets are engaged in servicing the international payment turnover associated with the payment of financial obligations of individuals and legal entities from different countries. The specifics here are their own, because there is no single means of payment for all countries. Thus, there is an urgent need to exchange one currency for another. This occurs in the foreign exchange market in the form of a sale or purchase of a particular currency by the recipient or payer. Currency markets are the official centers in which the purchase and sale of currencies takes place. The price is adjusted based on supply and demand in the money market.
Derivatives market
When it comes to financial derivatives, this term refers to derivative financial instruments based on simpler instruments such as bonds and stocks. For example, one of the main types of financial derivatives is an option. Options allow their holder to buy or sell shares.
Swaps are another type of derivatives. A swap is an agreement to exchange cash payments over a specified period of time. Futures -these are contracts for future deliveries (deliveries of goods that are not yet available). This includes contracts for the supply of currencies at a price fixed in the contract itself.
Money market and money market
It would seem that this is the same thing, but in fact the concepts are different. The money market is a market in which interest rates are determined by the parameter of money supply and demand. It is a sector of the debt capital market, where deposit and debt operations are carried out for a period of less than one year, i.e. short-term. The money market is a network of banking and financial institutions that are engaged in ensuring optimal supply and demand for money. In this way, money becomes a special commodity.
The money market is characterized as an asset market with high liquidity. The mechanism of its work is quite complicated, the subjects are dealer and brokerage firms, accounting houses and commercial banks. As an object of sale and purchase are temporary funds that are in a free state. The interest on the loan will determine the price of the commodity, i.e. money.
Instruments and participants
The monetary market includes a number of financial instruments.
Short-term securities:
- Agency bills (agencies that are sponsored by the government, such as a government mortgage institution).
- Bank bills.
- Municipal bills (settlement, rural, city).
- Treasury bills (government bills).
- Bonds.
- Commercial papers.
- Savings certificates.
- Short-term loans.
- Commercial loans.
- REPO transactions (sale of securities subject to repurchase).
Money market instruments are investments that are more suitable for making current profits, as opposed to instruments that are aimed at capital growth, such as stocks of companies that grow steadily above the average level in their industry. Money market instruments have a high degree of reliability. The minimum size of instruments is from one million dollars. Their repayment is possible within one day to one year, but three months or less is the most common period. The essential difference from commodity and stock exchanges is that the money market does not have a clear location.
Market participants
On the one hand, participants are persons who provide money for any period not exceeding one year. They are called creditors. The other side is represented by people who borrow money on terms dictated by lenders. They are called borrowers. There is also another category of market participants - financial intermediaries. This is the name of the persons with the help of which funds are transferred from creditors to borrowers, however, operations can also be performed without financial intermediaries.
Creditors and Borrowers
The role of both those and others in the money market can be:
- Banks.
- Legal entities(enterprises and various organizations).
- Non-bank credit institutions.
- Individuals.
- International Financial Institutions.
- States (certain organizations and structures).
- Other financial and credit organizations.
Financial intermediaries can be:
- Management companies.
- Brokers.
- Banks.
- Dealers.
- Professional stock market participants.
- Other financial institutions.
Income of creditors
Participants of the money market seek to receive income from operations carried out with various financial market instruments. Thus, lenders receive a profit in the form of interest on the money they lend. Borrowers also receive income, as borrowed funds bring them additional profit. Financial intermediaries work for a commission.
The main market participants are governments, money market mutual funds, corporations, commercial banks, brokers and dealers, futures exchanges and the Federal Reserve.
Non-banking and non-financial companies can raise funds by issuing commercial paper, which are short-term unsecured promissory notes. There have been more and more such firms in recent years.
Companies engaged in international trade receive funds using bank acceptances. A banker's acceptance is a time draft - a bill of exchange accepted by a bank. In this case, the draft becomes an unconditional obligationjar. A typical banker's acceptance works like this: the bank accepts the importer's time bill and then discounts it, paying the importer a little less than the bill's nominal value. The importer uses the received finance to pay the exporter. The bank retains the acceptance or sells it on the secondary market, and this operation is called rediscount.
Short-term investment pools
This is the name given to a highly specialized group of money market intermediaries. They are represented by money market funds, local government investment pools, short-term investment funds of trust departments of banks and other organizations. These intermediaries form large pools of money market instruments. Some of the available instruments are sold to other investors, thereby giving small investors and individuals the opportunity to earn money in this market. Such pools appeared quite recently, in the mid-seventies.
Futures and options
Futures and options are traded on stock exchanges. A money market futures contract is a standard agreement to sell or buy any security in this market at a price specified in the agreement and on a specific date. An option, on the other hand, gives its holder the right to sell or buy a futures contract at a specified date on or before a certain date.
Brokers and dealers
Stable monetary circulation of the money market largely depends onthe work of brokers and dealers, because they play a major role in promoting new releases of instruments in this market. Also important is their work in the secondary market, where you can sell unrealized instruments before they become due. When dealing with securities, dealers use a secondary purchase agreement. They are also intermediaries between buyers and sellers in the secondary market, provide loans to interested parties and borrow funds from individuals who are ready to provide them.
Brokers work with sellers and buyers for a commission. Brokers also play a key role in linking lenders and borrowers in the market for short-term loans. They are intermediaries between dealers in a number of other segments of the money and financial market.
Federal Reserve System
She is the main participant in this market and controls the process of providing reserve funds to banks and other depository institutions. Trading is carried out in the bond market or on a temporary basis in the secondary market. The Federal Reserve can influence the interest rate on short-term loans. An increase or decrease in the rate affects the rest of the money market rates.
It can also influence rates through discount rate mechanisms or a discount window. A change in the discount rate has a serious and direct impact on the rates of the market for short-term loans and other money market rates.
Conclusion
All participantseconomic relations, a transactional (cash) balance is maintained, which ensures planned expenses, regardless of cash receipts. Equilibrium in the money market is achieved through the use of funds in foreign currency and on demand accounts. The presence of a transactional balance is impossible without costs in the form of a percentage known in advance. Minimization of costs is achieved by participants of economic turnover by maintaining the equilibrium of the money market at the minimum possible level, which is required for daily transactions.
The missing part of the money balances by market participants is replenished by acquiring instruments that can be quickly converted into cash at minimal cost. Such instruments generally carry negligible price risk due to their short maturities. The need for short-term cash loans can also be met in the money market as needed through borrowing.
Recommended:
Money is Money: essence, types and functions
With the advent of the first production between people began to exchange. But it was not always possible to find the right amount of product for this operation. Money is the equivalent that began to be used when making an exchange. They can rightfully be considered an achievement of mankind, because modern life cannot be imagined without them
Foreign trade balance is Definition of the concept, its structure and essence
The trade balance as one of the key indicators significantly affects the economic situation of the country. The foreign trade balance is the difference between exports and imports (balance), in that order. In other words, the balance of trade is the difference between money flowing into and out of a country. Therefore, the balance can be both positive and negative (if expenses exceed income)
How to make money without money? Ways to make money. How to earn real money in the game
Today everyone can make good money. To do this, you need to have free time, desire, and also a little patience, because not everything will work out the first time. Many are interested in the question: "How to make money without money?" It's a perfectly natural desire. After all, not everyone wants to invest their money, if any, in, say, the Internet. This is a risk, and quite a big one. Let's deal with this issue and consider the main ways to make money online without vlo
Organizational structure of Russian Railways. Scheme of the management structure of Russian Railways. Structure of Russian Railways and its divisions
The structure of Russian Railways, in addition to the management apparatus, includes various dependent divisions, representative offices in other countries, as well as branches and subsidiaries. The head office of the company is located at: Moscow, st. New Basmannaya d 2
How to make money on tenders: the essence of earnings, pros and cons, tender bidding and income calculation
Tenders on a competitive basis and public procurement can be a good way to earn money and expand your business. The right approach to bidding will help you win and get a stable consumer, and most importantly - financial profit. What should be done and how to make money on tenders?
