Money Market Essay

Introduction

Money market is financial assets have maturity of less than 1 years. It becomes a component of financial market for assets involved in short-term and provide cash to lender or borrower. Trading of money market is done over the counter. Examples of money market are commercial paper, treasury bills, banker’s acceptance, Negotiable certificate of deposit (NCD), Short-term government stock and etc. The risk of money market is lower so the return also is lower. Money market also is a subsection of fixed income market. Example in Malaysia, the KWAP fund is invested in Islamic and conventional money market instrument. The money market instruments are invested by KWAP fund are Treasury bills, Bank Negara Monetary Notes, Deposits Certificates

When the time of emergency, when the commercial banks have scarcity of funds, they do not approach the central bank and borrow money at a higher interest rate, but they can meet their requirements by recalling their old short-run loans from the money market. Finally, the money market function is also to help the central bank. The central bank can also function and influence the banking system in the absence of a money market. By developing the money market can smoothens the functioning and also increases the efficiency of the central bank. Besides that, money market can helps the central bank in two ways. The first way is by giving short-run interest rates of the money market. In addition, it also serves as an indicator of the monetary and banking conditions in the country. In this way, it can guide the central bank to adopt an appropriate banking policy. Next, another way is the sensitive and integrated money market also helps the central bank to secure quick and widespread influence on the sub-markets. Thus, it will achieve effective implementation of its

Commercial paper refers to short-term unsecured promissory notes. Benefit of commercial paper is no need to register with the Securities and Exchange Commission (SEC) as long as it matures before 270 days, making it a very cost-effective. The risk of commercial paper is higher than other discount instrument and the finance of the corporate companies issued commercial paper must be strong.

There are two policy affect money market. The two policy are monetary policy and fiscal policy. Monetary policy is a process of a country control the money supply. The money supply is managed by the government, central bank and monetary authority to achieve the economy target which is set by the central bank. Monetary policy can change monetary base, required reserve rate and discount window lender. The type of changing can influence money market.

Other policy will affect money market is the fiscal policy. Fiscal policy is the change in government expenditures and taxes to achieve economy goals and also cause influence of money market such as low unemployment, price stability and economic growth. Fiscal policy is use government expenditures, government borrowing and taxes to control the economy. The fiscal policy also will cause influence of the rise in interest rate and fall in the investment on money