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MONEY MARKET
 What is Money Market?
- Money market means market where money or its equivalent can be
traded. Money is synonym of liquidity. Money market consists of
financial institutions and dealers in money or credit who wish to
generate liquidity. It is better known as a place where large institutions
and government manage their short term cash needs. For generation of
liquidity, short term borrowing and lending is done by these financial
institutions and dealers. Hence, money market is a market where short
term obligations such as treasury bills, commercial papers and bankers
acceptances are bought and sold.
- The money market is a wholesale market for funds – most trading
occurs in multiples of a million dollars.
- The market is dominated by a relatively small number of large
financial institutions that account for the bulk of federal funds trading.
Securities also move readily from sellers to buyers through the market-
making activities of major security dealers and brokers.
- And, of course, governments and central banks around the world play
major roles in the money market as the largest borrowers and as
regulators. The money market supplies the cash needs of short-term
borrowers and provides savers who hold temporary cash surpluses
with an interest-bearing outlet for their funds.
 Why Money Market Necessary?
- The money market arises because for most individuals and
institutions, cash inflows and outflows are rarely in perfect harmony
with each other, and the holding of idle surplus cash is expensive.
- To cover the wages and salaries of government employees, office
supplies, repairs, and fuel costs as well as unexpected expense.
- Need for short term funds by Banks.
- Outlet for deploying funds on short term basis.
- Optimize the yield on temporary surplus funds.
- Regulate the liquidity and interest rates in the conduct of monetary
policy to achieve the broad objective of price stability, efficient
allocation of credit and a stable foreign exchange market.
 Activities of Money Market
- Provides a channel for the exchange of financial assets for
money.
- To meet short-term cash needs.
- The money market is the mechanism through which
holders of temporary cash surpluses meet holders of
temporary cash deficits.
 Participates in the Money Markets
1. Central Bank
2. Commercial Banks, Co-operative Banks, Finance, industrial and
service companies, Money market mutual funds and Primary Dealers
are allowed to borrow and lend.
3. Financial Institutions, Mutual Funds, and certain specified entities are
allowed to access to Call/Notice money market only as lenders.
4. Individuals, firms, companies, corporate bodies, trusts and
institutions can purchase the treasury bills, CPs and CDs.
5. All other financial institutions (investing)
6. Short-term investing for income and liquidity
7. Short-term financing for short and permanent needs
8. Large transaction size and telecommunication network.
 The Goals of Money Market Investors?
1. Money market investors seek mainly safety and liquidity, plus the
opportunity to earn some interest income.
2. Because funds invested in the money market represent only
temporary cash surpluses and are usually needed in the near future
to meet tax obligation, cover wage and salary costs, pay stockholder
dividends, and so one. money market investors are especially
sensitive to risk.
 Risks Investors face in Money Market?
1. Market risk – The risk that the market value of an asset will
decline, resulting in a capital loss when sold. Also called interest
rate risk.
2. Reinvestment risk – The risk that an investor will be forced to
place earnings from a security into a lower-yielding investment
because interest rates have fallen.
3. Default risk – The probability that a borrower fails to meet one or
more promised principal or interest payments on a security.
4. Inflation risk – The risk that increases in the general price level will
reduce the purchasing power of earnings from the investment.
5. Currency risk – The risk that adverse movements in the price of a
currency will reduce the net rate of return from a foreign
investment. Also called exchange rate risk.
6. Political risk – The probability that changes in government laws or
regulations will reduce the expected return from an investment.

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Money market

  • 2.  What is Money Market? - Money market means market where money or its equivalent can be traded. Money is synonym of liquidity. Money market consists of financial institutions and dealers in money or credit who wish to generate liquidity. It is better known as a place where large institutions and government manage their short term cash needs. For generation of liquidity, short term borrowing and lending is done by these financial institutions and dealers. Hence, money market is a market where short term obligations such as treasury bills, commercial papers and bankers acceptances are bought and sold. - The money market is a wholesale market for funds – most trading occurs in multiples of a million dollars. - The market is dominated by a relatively small number of large financial institutions that account for the bulk of federal funds trading. Securities also move readily from sellers to buyers through the market- making activities of major security dealers and brokers. - And, of course, governments and central banks around the world play major roles in the money market as the largest borrowers and as regulators. The money market supplies the cash needs of short-term borrowers and provides savers who hold temporary cash surpluses with an interest-bearing outlet for their funds.
  • 3.  Why Money Market Necessary? - The money market arises because for most individuals and institutions, cash inflows and outflows are rarely in perfect harmony with each other, and the holding of idle surplus cash is expensive. - To cover the wages and salaries of government employees, office supplies, repairs, and fuel costs as well as unexpected expense. - Need for short term funds by Banks. - Outlet for deploying funds on short term basis. - Optimize the yield on temporary surplus funds. - Regulate the liquidity and interest rates in the conduct of monetary policy to achieve the broad objective of price stability, efficient allocation of credit and a stable foreign exchange market.
  • 4.  Activities of Money Market - Provides a channel for the exchange of financial assets for money. - To meet short-term cash needs. - The money market is the mechanism through which holders of temporary cash surpluses meet holders of temporary cash deficits.
  • 5.  Participates in the Money Markets 1. Central Bank 2. Commercial Banks, Co-operative Banks, Finance, industrial and service companies, Money market mutual funds and Primary Dealers are allowed to borrow and lend. 3. Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders. 4. Individuals, firms, companies, corporate bodies, trusts and institutions can purchase the treasury bills, CPs and CDs. 5. All other financial institutions (investing) 6. Short-term investing for income and liquidity 7. Short-term financing for short and permanent needs 8. Large transaction size and telecommunication network.
  • 6.  The Goals of Money Market Investors? 1. Money market investors seek mainly safety and liquidity, plus the opportunity to earn some interest income. 2. Because funds invested in the money market represent only temporary cash surpluses and are usually needed in the near future to meet tax obligation, cover wage and salary costs, pay stockholder dividends, and so one. money market investors are especially sensitive to risk.
  • 7.  Risks Investors face in Money Market? 1. Market risk – The risk that the market value of an asset will decline, resulting in a capital loss when sold. Also called interest rate risk. 2. Reinvestment risk – The risk that an investor will be forced to place earnings from a security into a lower-yielding investment because interest rates have fallen. 3. Default risk – The probability that a borrower fails to meet one or more promised principal or interest payments on a security. 4. Inflation risk – The risk that increases in the general price level will reduce the purchasing power of earnings from the investment. 5. Currency risk – The risk that adverse movements in the price of a currency will reduce the net rate of return from a foreign investment. Also called exchange rate risk. 6. Political risk – The probability that changes in government laws or regulations will reduce the expected return from an investment.