Money Market: Mastering Money Markets, a Comprehensive Guide to Finance and Economics

By Fouad Sabry

What is Money Market

The money market is a component of the economy that provides short-term funds. The money market deals in short-term loans, generally for a period of a year or less.

How you will benefit

(I) Insights, and validations about the following topics:

Chapter 1: Money market

Chapter 2: Federal Reserve

Chapter 3: Financial market

Chapter 4: Security (finance)

Chapter 5: Market liquidity

Chapter 6: Bond (finance)

Chapter 7: Fractional-reserve banking

Chapter 8: Repurchase agreement

Chapter 9: Open market operation

Chapter 10: Cash and cash equivalents

Chapter 11: Money market fund

Chapter 12: Commercial paper

Chapter 13: Mortgage-backed security

Chapter 14: Structured investment vehicle

Chapter 15: Asset and liability management

Chapter 16: Shadow banking system

Chapter 17: Subprime crisis background information

Chapter 18: Federal Reserve responses to the subprime crisis

Chapter 19: Interbank lending market

Chapter 20: Public-Private Investment Program for Legacy Assets

Chapter 21: Asset-backed commercial paper program

(II) Answering the public top questions about money market.

(III) Real world examples for the usage of money market in many fields.

Who this book is for

Professionals, undergraduate and graduate students, enthusiasts, hobbyists, and those who want to go beyond basic knowledge or information for any kind of Money Market.

• Language: English
• Publisher: One Billion Knowledgeable
• Release date: Jan 21, 2024

Book preview

Chapter 1: Money market

The money market is an economic component that supplies short-term funds. Money market transactions typically involve loans with terms of one year or less.

As short-term securities became a commodity, the money market for assets with original maturities of one year or less became a component of the financial market. Over-the-counter and wholesale transactions occur on money markets.

In the majority of Western nations, there are various money market instruments, such as treasury bills, commercial paper, banker's acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-term mortgage- and asset-backed securities. A market is considered to be a money market if it consists of highly liquid, short-term assets. Typically, money market funds invest in government securities, certificates of deposit, corporate commercial paper, and other highly liquid, low-risk investments. Commodity money, fiat money, fiduciary money (checks, banknotes), and commercial bank money are the four most significant types of money. Commodity money utilizes intrinsically valuable commodities as a medium of exchange. In contrast, fiat currency derives its value from a government decree.

Money markets, which provide liquidity for the global financial system, including capital markets, are a component of a larger system of financial markets.

The money market is comprised of financial institutions and money or credit dealers who wish to borrow or lend. Participants typically borrow and lend for periods of up to twelve months. Money market transactions involve short-term financial instruments, also known as paper. This is in contrast to the capital market for longer-term financing, which is comprised of bonds and equity.

Interbank lending is the foundation of the money market, with banks borrowing and lending to one another using commercial paper, repurchase agreements, and similar instruments. Typically, these instruments are priced relative to the London Interbank Offered Rate (LIBOR) for the appropriate term and currency.

Typically, finance companies finance themselves through the issuance of substantial amounts of asset-backed commercial paper (ABCP), which is secured by the pledge of eligible assets into an ABCP conduit. Auto loans, credit card receivables, residential/commercial mortgage loans, mortgage-backed securities, and similar financial assets are examples of eligible assets. On their own credit, some large corporations with strong credit ratings issue commercial paper. Other large businesses have banks issue commercial paper on their behalf.

In the United States, federal, state, and local governments all issue paper in order to meet their financial obligations. States and local governments issue municipal paper, whereas the U.S. Treasury issues Treasury bills to finance the national debt:

Frequently, trading companies acquire bankers' acceptances for payment to overseas suppliers.

Institutional and retail money market funds

Banks

Central banks

Cash management programs

Merchant banks

Money markets serve five purposes: to finance trade, finance industry, invest profitably, increase the self-sufficiency of commercial banks, and facilitate central bank policies.

The role of the money market in financing domestic and international trade is crucial. Bills of exchange, which are discounted by the bill market, provide traders access to commercial financing. Acceptance houses and discount markets contribute to financing international trade.

In two ways, the money market contributes to the expansion of industries:

Through the system of finance bills, commercial papers, etc., they help industries obtain short-term loans to satisfy their working capital needs.

Typically, industries require long-term loans, which are provided by the capital market. However, the nature and conditions of the money market influence the capital market. The money market's short-term interest rates influence the capital market's long-term interest rates. Thus, the money market indirectly benefits the industries via its connection to and influence on the long-term capital market.

The money market allows commercial banks to invest their excess reserves for a profit. The primary objective of commercial banks is to generate income from their reserves and maintain sufficient liquidity to meet the unpredictability of their depositors' cash demands. The excess reserves of commercial banks are invested in near money assets (such as short-term bills of exchange) that are easily convertible into cash on the money market. Therefore, commercial banks generate profits without compromising liquidity.

Developed money markets aid in the independence of commercial banks. In an emergency, when commercial banks lack funds, they are not required to borrow at a higher interest rate from the central bank. They can instead meet their needs by recalling their previous money market short-term loans.

Despite the fact that the central bank can function and influence the banking system in the absence of a money market, the existence of a developed money market facilitates and improves the central bank's efficiency.

Two ways money markets aid central banks:

The short-term interest rate serves as an indicator of the country's monetary and banking conditions and thus guides the central bank in formulating an appropriate banking policy, Sensitive and integrated money markets enable the central bank to exert rapid and extensive influence on the submarkets, thereby facilitating the effective implementation of monetary policy.

Commonly offered to consumers by banks, thrift institutions, and credit unions, a certificate of deposit is a time deposit.

Repurchase agreements – Short-term loans arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date, typically for less than one week and frequently for one