Money market is a part of fixed income market. It is a wholesale market. Fixed income market financial instruments with maturity period less than 1 year are traded in money market. Liquidity in money market is very high. From the point of view of liquidity, holding a money market security is as good as holding cash or money and hence the name.
Money market is a collection of Over The Counter s (OTCs) where short term lending and borrowing happens. Many times the period of lending or borrowing is as short as ‘over night’. Most of the transactions in the money market are conducted by banks, central bank (reserve bank in India) financial institutions, Corporates and specialists.
Banks use this market to cover their shortages by borrowing from other banks which have surplus short term money. In money market the bid rate is the borrowing rate and the offer rate is the lending rate of a bank. Inter Bank offer rate inLondonis called LIBOR and bid rate is called LIBID. The most common maturities in money market are 1 month,3 months, 6 months and 12 months. LIBOR is not the short term interest rate on GBP. It could be on any currency. The money market deals with different currencies and the LIBOR is specified for each currency that is available in money market. The LIBOR for a particular currency depends on the interest rates in domestic market of these currencies. This gives very less chances of arbitrage.
The following instruments constitute money market
- Treasury bills
- Certificates of Deposit
- Commercial Papers
- Call Money
- Repo
Sathish Emmadi
Sathish Emmadi is a co-founder & editor at Lastbull.com. He is presently working in IT for one of the world’s top mutual fund companies. Handled multiple projects in BFSI (Banking,Financial Services and Insurance) domain. An Engineering Graduate from NITW.
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I must thank you for the crisp and concise information provided at one single place. I will be looking forward to more of such posts in future
Thanks Sir!
These terms has threatened me a lot at my college times but you cleared it very simply.