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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
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I. INTRODUCTION
We studied about money market operation. What it money market? What is the function
of the money market? Does money market is important? Where do we use the money market?
And when do we use it? The money market is where financial instruments with high liquidity
and very short maturities are traded. It is used by participants as a means for borrowing and
lending in the short term, with maturities that usually range from overnight to just under a year.
The money market is where financial instruments with high liquidity and very short
maturities are traded. It is used by participants as a means for borrowing and lending in the short
term, with maturities that usually range from overnight to just under a year. Among the most
common money market instruments are Eurodollar deposits, negotiable certificates of deposit
(cds), bankers acceptances, U.S. treasury bills, commercial paper, municipal notes, federal funds
and repurchase agreements (repos).
II. ABSTRACT
The money market thus may be defined as a Centre in which financial institutions congregate for
the purpose of dealing impersonally in monetary assets. In a wider spectrum, a money market can
be defined as a market for short-term money and financial assets that are near substitutes for
money. The term short-term means generally a period up to one year and near substitutes to money
issued to denote any financial asset which can be quickly converted into money with minimum
transaction cost. This is a market for borrowing and lending short-term funds. Banks, financial
institutions, investment institutions, and corporates attempt to manage the mismatch between
inflow and outflow of funds by lending in or borrowing from the money market
We study the money market for the purpose of our daily lives and for our economy.
Creating, investing in, buying and selling short term obligations in the market for short term debt
instruments. Actions undertaken by larger institutions in order to gain short-term funds from
investors. Those same investors gain interest payments, yet still keep their invested funds liquid;
having "the best of both worlds." However, this does not come without significant financial
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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________
risk.Money market transactions are wholesale, meaning that they are for large denominations and
take place between financial institutions and companies rather than individuals. Money market
funds offer individuals the opportunity to invest smaller amounts in these assets.
III. DISCUSSION
Money market refers to the market where money and highly liquid marketable securities
are bought and sold having a maturity period of one or less than one year. It is not a place like
the stock market but an activity conducted by telephone. The money market constitutes a very
important segment of the Indian financial system.
The highly liquid marketable securities are also called as ‘ money market instruments’ like treasury
bills, government securities, commercial paper, certificates of deposit, call money, repurchase
agreements etc.
According to the Geoffrey, “money market is the collective name given to the various
firms and institutions that deal in the various grades of the near money.”
As per RBI definitions “A market for short terms financial assets that are close substitute
for money, facilitates the exchange of money in primary and secondary market”.
The money market is a mechanism that deals with the lending and borrowing of short term funds
(less than one year).
A segment of the financial market in which financial instruments with high liquidity and
very short maturities are traded.
It doesn’t actually deal in cash or money but deals with substitute of cash like trade bills,
promissory notes & govt papers which can converted into cash without any loss at low
transaction cost.
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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________
Actions undertaken by larger institutions in order to gain short-term funds from investors.
Those same investors gain interest payments, yet still keep their invested funds liquid; having "the
best of both worlds." However, this does not come without significant financial risks.
The borrowing and re-lending of highly liquid, short-term assets and securities. Examples
include the borrowing and re-lending of U.S. Treasury bills and commercial paper. Money market
operations are conducted between banks. See also: Banker‘s acceptance.
FEATURES
It is a market purely for short-terms funds or financial assets called near money.
It deals with financial assets having a maturity period less than one year only.
It is not a single homogeneous market, it comprises of several submarket like call money
market, acceptance & bill market.
The component of Money Market are the commercial banks, acceptance houses & NBFC
(Non-banking financial companies).
In Money Market transaction cannot take place formal like stock exchange, only through
oral communication, relevant document and written communication transaction can be done.
OBJECTIVES
To enable the central bank to influence and regulate liquidity in the economy through its
intervention in this market.
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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________
Money Market consists of a number of sub-markets which collectively constitute the money
market. They are,
Acceptance market
A variety of instrument are available in a developed money market. In India till 1986, only a
few instrument were available. They were
• Treasury bills
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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________
A short-term loan that does not have a set repayment schedule, but is payable
immediately and in full upon demand. Money-at-call loans give banks a way to
earn interest while retaining liquidity. Investors might use money at call to cover a
margin account. The interest rate on such loans is called the call-loan rate.
.NEW INSTRUMENTS
Now, in addition to the above the following new instrument are available:
Commercial papers.
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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
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Certificate of deposit.
Repo instrument
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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________
For the party selling the security, and agreeing to repurchase it in the future, it is a
repo; for the party on the other end of the transaction, buying the security and
agreeing to sell in the future, it is a reverse repurchase agreement.
Banker's Acceptance
Repurchase agreement
A money market fund (also called a money market mutual fund) is an open-ended
mutual fund that invests in short-term debt securities such as US Treasury bills and
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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________
commercial paper. Money market funds are widely (though not necessarily
accurately) regarded as being as safe as bank deposits yet providing a higher yield.
I: ORGANISED STRUCTURE
3. Commercial banks
I. Public sector banks
SBI with 7 subsidiaries
Cooperative banks
20 nationalized banks
ii. Private Banks
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________
Absence of integration.
Limited instruments.
Limited participants.
Existence of sub-market
Ample resources
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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion
Money Market Operations
_____________________________________________________________________________________
Establishment of DFHI
IV. REFERENCES
http://www.businessdictionary.com/definition/money-market-operations.html
http://financial-dictionary.thefreedictionary.com/Money+Market+Operations
http://www.teachmefinance.com/Financial_Terms/money_market_operations.html
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Monetary Policy & Central Banking FIN151 Prof. A. V. Clarin
RAM Romero 1st Sem 2016-2017
KPC Rosas National University
KMC Salvacion