This article needs additional citations for verification. As money became a commodity, the money market became a component of the financial markets for assets involved forex wiki pledge short-term borrowing, lending, buying and selling with original maturities of one year or less.
Money markets, which provide liquidity for the global financial system, and capital markets make up the financial market. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods, typically up to twelve months. Money market trades in short-term financial instruments commonly called “paper”. The core of the money market consists of interbank lending—banks borrowing and lending to each other using commercial paper, repurchase agreements and similar instruments. In the United States, federal, state and local governments all issue paper to meet funding needs. States and local governments issue municipal paper, while the U.
Trading companies often purchase bankers’ acceptances to tender for payment to overseas suppliers. Money markets serve five functions—to finance trade, finance industry, invest profitably, enhance commercial banks’ self-sufficiency, and lubricate central bank policies. The money market plays crucial role in financing domestic and international trade. Commercial finance is made available to the traders through bills of exchange, which are discounted by the bill market.
The acceptance houses and discount markets help in financing foreign trade. They help industries secure short-term loans to meet their working capital requirements through the system of finance bills, commercial papers, etc. Industries generally need long-term loans, which are provided in the capital market. However, the capital market depends upon the nature of and the conditions in the money market.
The short-term interest rates of the money market influence the long-term interest rates of the capital market. Thus, money market indirectly helps the industries through its link with and influence on long-term capital market. The Money Market enables the commercial banks to use their excess reserves in profitable investment. The main objective of the commercial banks is to earn income from its reserves as well as maintain liquidity to meet the uncertain cash demand of the depositors. Developed money markets help the commercial banks to become self-sufficient. In the situation of emergency, when the commercial banks have scarcity of funds, they need not approach the central bank and borrow at a higher interest rate.