Saturday, August 22, 2009

What is Money Market?

Money market consists of all those institutions which raise short term funds. The short term borrowers consist of businessmen, whole-sellers, investors and firms. Thus money market is a market of short term transactions and the activities of this market comprise of discounting houses, commercial banks and central bank. Short run money market is concerned with the running and existing business. It is so because that the small firms borrow for short term loans to run their business. The short term funds are obtained from organised money market and unorganised money market. The organised money market consists of commercial banks while the unorganised money market consist of money lenders, Artihiyas, relatives and friends. In short run the funds are raised against financial documents, bills of exchange and short term securities. The commercial banks not only discount the bills of exchange, but also advance loans against mortgages. Thus the money market consist of govt. commercial banks, money lenders, brokers, businessmen firms etc. In money market the resources are raised from the whole economy and then are channelized into different sectors of the economy.
INSTRUMENTS OF MONEY MARKET
The main short term debt instruments traded in the money market are as follows.
(i) Treasury Bills: The treasury bills are the short term debt instruments issued by the central bank of a country. They are always issued on discount basis and the period of maturity ranges from 3 months to 12 months. The government of a country pays a set amount at the maturity of the bill and have no interest payment.
The state Bank of Pakistan has been actively engaged in the market oriented monetary policies it is pursuing open market operations in order to manage government debt and the reserve money. Since 1998 the State Bank of Pakistan has introduced market treasury bills of 3, 6 and 12 months maturity.
Treasury bills are the most liquid of all the money market instruments. They are also the safest among all of them as there is no possibility of default in them. The federal Govt: is always able to meet its debt obligations.
(ii) Bill of Exchange: Bill of exchange is another important short term debt instrument. The commercial banks advance loans by discounting bills of exchange of their client. These loans are granted to meet the working capital requirements of the firms.
(iii) Call Loans: Call loans are loans which are granted for a very short period not exceeding 15 days in any case. Bill brokers and dealers in the stock exchange generally borrow money at call from the commercial banks. The borrowers have to repay the money immediately whenever the banks call these loans back. No collateral securities are needed against these loans.
Some times the lenders and borrowers of call loans are commercial banks only. The banks with surplus funds lend to the banks with credit funds for a day and are renewable on day to day basis.
(iv) Banker’s Acceptance: A banker’s acceptance is a draft issued by a firm upon a bank and accepted by it. The bank here is required to pay to the order of a specific party or to the bearer a specific sum of money at some future date. Banker ’s acceptances are used mostly in financing the commercial transactions both drafts can be sold or discounted in the money market named acceptance market.
(v) Repurchase Agreement (Repos): Repos re short term loans which usually mature within less than two weeks. Here the treasury bills serve as security for the loans. Repos are important source of bank funds.

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