MONEY MARKET AND ITS PARTICIPANTS

Date: 2015-10-07; view: 486.

TEXT A

Comment on the following quotations. What do the authors mean? Do you agree with them? Having discussed these quotations can you guess what the next text is devoted to?

LEARNING OBJECTIVES

MONEY MARKET

UNIT

What is your age?

Which mass media resources do you usually use?

[ ] magazine (which): ………………………………………………….……….………

[ ] fashion magazine (which): ………………………………………….………………

[ ] TV shows (which): ………………………………………………….………………

[ ] web sites (which): …………………………………………………….…………….

After studying this unit, you should be able to:

· define the notion of money market;

· state the role of money market;

· define the terminology related to money market ;

· outline the main characteristics of money market;

· describe the benefits of money market;

· enumerate the main participants of money market;

· be aware of the money market instruments.

STARTING-UP

· The rich invest in time, the poor invest in money. Warren Buffett

· Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.Warren Buffett

· Markets are designed to allow individuals to look after their private needs and to pursue profit. It's really a great invention and I wouldn't under-estimate the value of that, but they're not designed to take care of social needs. George Soros

· The financial markets generally are unpredictable. So that one has to have different scenarios... The idea that you can actually predict what's going to happen contradicts my way of looking at the market. George Soros

The term money market is actually a misnomer. Money—currency - is not traded in the money markets. Because the securities that do trade there are short-term and highly liquid, however, they are close to being money. Money market securities have three basic characteristics in common:

· They are usually sold in large denominations.

· They have low default risk.

· They mature in one year or less from their original issue date. Most money market instruments mature in less than 120 days.

Money market transactions do not take place in any one particular location or building. Instead, traders usually arrange purchases and sales between participants over the phone and complete them electronically. Because of this characteristic, money market securities usually have an active secondary market. This means that after the security has been sold initially, it is relatively easy to find buyers who will purchase it in the future.

Another characteristic of the money markets is that they are wholesale markets. This means that most transactions are very large, usually in excess of $1 million. The size of these transactions prevents most individual investors from participating directly in the money markets. Instead, dealers and brokers, operating in the trading rooms of large banks and brokerage houses, bring customers together.

Despite the wholesale nature of the money market, innovative securities and trading methods have been developed to give small investors access to money market securities.

In theory, the money markets should not be needed. The banking industry exists primarily to provide short-term loans and to accept short-term deposits. Banks should have an efficiency advantage in gathering information, an advantage that should eliminate the need for the money markets. Furthermore, short-term securities offered for sale in the money markets are neither as liquid nor as safe as deposits placed in banks and thrifts.

The banking industry exists primarily to mediate the asymmetric information problem * between saver-lenders and borrower-spenders, and banks can earn profits by capturing economies of scale while providing this service. However, the banking industry is subject to more regulations and governmental costs than are the money markets. In situations where the asymmetric information problem is not severe, the money markets have a distinct cost advantage over banks in providing short-term funds.

The well-developed secondary market for money market instruments makes the money market an ideal place for a firm or financial institution to "warehouse" surplus funds until they are needed. Similarly, the money markets provide a low- cost source of funds to firms, the government, and intermediaries that need a short-term infusion of funds.

Most investors in the money market use the money market as an interim

_________________________________________________________________

asymmetric information problem * - Information asymmetry arises when the parties to a transaction do not have the same degree of information necessary to make an informed decision.
investment that provides a higher returnthan holding cash or money in banks. It is

important to keep in mind that holding idle surplus cash is expensive for an investor because cash balances earn no income for the owner. Idle cash represents an opportunity cost in terms of lost interest income. The money markets provide a means to invest idle funds and to reduce this opportunity cost.

The sellers of money market securities find that the money market provides a low-cost source of temporary funds.