Money Markets – Significance and Role: The flow of money in the market ensures the inflation is in check, and there is no cash crunch. The Covid-19 pandemic has already exhibited how in the wake of no funds, businesses can stall, and the GDPs can fall into a bottomless pit.
The Coronavirus testifies the importance and significance of the money market. Its instruments are securities that offer a large amount of capital for a brief period to governments, businesses and banks at a low rate. The time can range anywhere to a fortnight, half a day, months, weeks but lesser than a year. Those who have cash needs for a long-term purpose, then they can seek help from financial markets.
Why Businesses Require Money Markets?
When any business firm sells products, they do not receive money for it immediately and might take weeks to months to come. In that case, they cannot stall the production. Hence, they require some quick funds to channelise their work. For meeting the demand, the role of money market, which is an organised exchange. It allows traders or participants can borrow and lend a tremendous amount of capital comes into play. Besides, it is boon for small investors looking to garner an extra income while reassured of the safety of their funds.
Key Benefits of The Money Market
- Mutual funds by the money market have a credible and the most accessible approach towards a participant.
- The liquidity and safety feature draw traders towards its instruments.
- The short-term pools for investment are:- governments, trusted departments, mutual funds etc.
- There are treasury bills. The US Treasury issues these bills for refinancing.
Kinds of Money Market Instrument
It is the instruments that establish and explain the broader outlook of the money market. They are there to help meet distinct needs for different customers. Here are few:
Those banks which are unable to seek or borrow Fed money from other banks. Then they have the option to avail it from the Fed’s discount window. However, it does not come easy; banks have to pay extra on the discount rate, higher than the standard fed funds rate. Although, it wishes banks to do the borrowing task from each other and remains there to extend assistance during an emergency.
Companies holding a stupendous record of credit have the authority to issue promissory notes, which are unsecured to raise the capital. Any asset that has a backing of commercial paper is like a derivative upon it. Also, they have a design to help big financial institutions and banks besides focusing on businesses.
For raising the short-term cash banks to have a job to issue deposit certificates. The duration for it ranges from one month to six months. Investors have a benefit in it. The longer their cash remains with the banking authority; the better are the chances for them to accumulate interest on their amount.
Commonly known as a repo, is a deal with a promise made by banks while issuing securities that they would repurchase them at a significant price later on. It means that some interest gets added each day. It is a collateral debt of short-term or a brief period. Here, the security buyer has the authority to implement a reverse repo for he/she is the actual lender.
It accounts for a letter issued for credit by a bank mentioning that if the issuer ceases to redeem the instrument of money market, then it would.
Notes of Municipal:
For raising cash, cities or states issue municipal bonds for short-term. The best part is that its interest payments are free from any kind of federal taxes.
Its job is similar to that of a bank providing loans for international trades. Banks take up the responsibility for their customers that they would make the payment after 30-60 days for the products received. For example, most of the traders work on debts or credits. They take the delivery of goods and then make the payment to the party. But in case of denial, the importer can approach a bank that can shoulder the responsibility of the payment.
Bills of Treasury:
It is a means by which the federal government gets or raises money for their projects and important tasks. The stipulated period for it is mostly up to one year or less.
These are a kind of derivatives where two parties agree on exchanging or share all the interest rate payments of the future deriving from a loan. Here, one can exchange valuation of bonds without getting into the legal proceedings or selling and buying tactics. It offers a chance to avoid risks that arise from the alteration of the interest rates of the future.
The Credit of The Backup Line
It refers to a note of a brief-period that has to put investors in a safety zone in a company. In case if the issuer becomes a defaulter, the bank is liable to pay up to 100 per cent of the total money market instrument.
Futures Options: Traders have an opportunity to buy ‘options’, that comes with no baggage of selling or buying the futures contract of the money market on a specific date or before.
Futures Contracts: It also comes with obligations to buyers and sellers to trade the security for a money market on an agreed date and price in the future. Typically, there are four types of instruments: Eurodollars, treasury bills, fed funds rate 30-day average and interest swaps.
Eurodollars: Banks have an option to issue certificates of deposits in banks stationed in other nations or foreign banks. However, instead of US dollars, they are held in Euros.
Importance of Money Markets
These have the capacity of providing the advantage of several instruments treasury bills, mutual funds etc. It also allows a chance to an individual for purchasing cash of deposits and futures contracts through a bank and brokerage respectively. A trader can use a broker or a company to trade in future options.
PS: Some of the instruments offer a cover from risks or rising interest rates. One can check products or goods that come with a variable interest rate. For getting it done, a bank can help in money market accounts.