The money market is a key link in the system of money circulation, due to which the work of the mechanisms of distribution and redistribution of cash flows in the economy is possible. The migration of funds between various entities is ongoing, it arises due to the availability of supply and demand for cash.
Theoretical basis
The money market is divided into several categories. These are the currency, interbank and accounting markets. There is also a derivatives market.
The accounting market includes commercial and treasury bills and other money market securities (other short-term liabilities). It turns out that a huge mass of short-term securities is circulating in the accounting market. Their main parameter is mobility and high liquidity.
The interbank market is part of the loan capital market. Here, the funds of credit organizations that are temporarily free are used by banks among themselves. As a rule, this is organized in the form of a short-term interbank deposit. The most common deposits are for 1, 3 or 6 months, and the deadlines are 1-2 years, but sometimes the term can be increased to 5 years. Banks can also use the money circulating in the interbank market 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 the requirements of state regulatory authorities.
Foreign exchange markets are engaged in servicing international payment transactions related to the payment of financial obligations of individuals and legal entities of various countries. The specifics are different here, because there is no single means of payment for all countries. Thus, there is an urgent need to exchange some currencies for others. This happens in the foreign exchange market in the form of sale or purchase of a particular currency by the recipient or payer. Foreign exchange markets are official centers in which the purchase and sale of currencies takes place. Price is regulated based on supply and demand in the money market.
Derivatives market
When it comes to financial derivatives, this concept refers to derivative financial instruments, the basis of which are 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. Swap is an agreement on the exchange of cash payments in a certain period of time. Futures are contracts for future deliveries (deliveries of goods that are not yet available). This includes contracts for the supply of currencies at the price fixed in the contract itself.
Money Market and Money Market
It would seem that this is one and the same, but in reality the concepts are different. The money market is a market in which interest rates are determined by the demand and supply of money. It is a sector of the debt capital market; deposit and debt operations are conducted here for a period of less than one year, i.e., short-term ones. The cash market is a network of banking and financial institutions that provide optimal supply and demand for money. Thus, money turns into a special product.
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 the object of sale are temporary funds in a free state. The loan interest will determine the price of this product, that is, money.
Tools and Participants
The monetary market includes a number of financial instruments.
Short-term securities:
- Agency bills (agencies sponsored by the government, such as a state-owned mortgage institution).
- Bank bills.
- Municipal bills (township, rural, urban).
- Treasury bills (government bills).
- Bonds.
- Commercial papers.
- Savings certificates.
- Short-term loans.
- Commercial loans.
- REPO transactions (sale of securities with the condition of repurchase).
Money market instruments are objects of investment that are more suitable for making current profits, in contrast to instruments that aim to increase capital, such as stocks of companies that are growing stably 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 in the range from one day to one year, but three months or less is the most common term. The essential difference from commodity and stock exchanges is this: the money market does not have a clear location.
Market participants
On the one hand, participants are individuals who provide money for a period not exceeding one year. They are called lenders. The other side is represented by persons borrowing 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 persons with the help of which money is transferred from lenders to borrowers, however, operations can be carried out without financial intermediaries.
Lenders 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 organizations.
- Individuals
- International financial organizations.
- States (certain organizations and structures).
- Other financial and credit organizations.
Financial intermediaries may be:
- Management companies.
- Brokers.
- Banks
- Dealers
- Professional stock market participants.
- Other financial and credit institutions.
Lenders Income
Money market participants seek to earn income from operations conducted with various financial instruments of the market. So, lenders make a profit in the form of interest on the money they loan. Borrowers also receive income, since borrowed funds bring them additional profit. Financial intermediaries work for a commission.
The main market participants are governments, joint money market 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 papers, which are short-term unsecured promissory notes. There are more and more such firms in recent years.
Companies engaged in international trade, receive funds using bank acceptances. Bank acceptance is an urgent waste - a bill of exchange accepted by a bank. In this case, the draft becomes an unconditional obligation of the bank. A typical bank acceptance works this way: the bank accepts the urgent draft of the importer, and then discounts it, paying the importer a little less than the nominal value of the draft. The importer uses the finances received to pay the exporter. The bank retains the acceptance or sells it on the secondary market, and this operation is called a rediscount.
Short-Term Investment Pools
This is the name of a highly specialized group of money market intermediaries. They are represented by money market funds, local government investment pools, short-term investment funds of bank trust departments and other organizations. These intermediaries form large pools of money market instruments. Some of the available instruments are sold to other investors, thereby small investors and individuals have the opportunity to earn money in this market. Such pools appeared quite recently, in the mid-seventies.
Futures and options
Futures contracts and options are traded on exchanges. A money market futures contract is a standard agreement on the sale or purchase of any security of this market at the price agreed upon in the agreement and on a specific date. An option, however, gives its holder the right to sell or buy a futures contract at a specified date or before.
Brokers and Dealers
The stable monetary circulation of the money market to a large extent depends on the work of brokers and dealers, because they play a major role in promoting new issues of instruments in this market. Their work is also important in the secondary market, where you can sell unsold instruments before the due date for them. 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 persons interested in them and borrowing funds from people 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 short-term loan market. They are intermediaries between dealers in a number of other segments of the monetary 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. In this case, trade is carried out on the bond market or on a temporary basis in the secondary market. The Federal Reserve may affect the interest rate on short-term loans. Raising or lowering the rate affects the rest of the money market rates.
It can also influence bets by means of discount rate mechanisms or a discount window. A change in the discount rate has a serious and direct effect on short-term loan market rates and on other money market rates.
Conclusion
All participants in economic relations maintain a transaction (cash) balance, which ensures the planned costs, regardless of cash receipts. Equilibrium in the money market is achieved through the use of funds in foreign currency and on demand accounts. A transaction balance is not possible without costs in the form of interest, known in advance. Cost minimization is achieved by participants in economic turnover by maintaining the equilibrium of the money market at the lowest possible level that is required for daily transactions.
The missing part of cash balances is replenished by market participants through the acquisition of instruments that can be quickly converted into cash at minimal cost. Such instruments, as a rule, have insignificant price risk due to the short maturity. The need for short-term cash loans can also be met in the money market as necessary by borrowing.