In this chapter we will discuss: How foreign exchange rates are determined; what accounts for their fluctuations over days, months, years, and decade, and the connection of foreign exchange rates and exchange markets. | Chapter 10 Introduction to the Money Market and the Roles Played by Governments and Security Dealers Learning Objectives To understand the many roles and functions performed by the money market. To identify the key money market players. To examine the roles that governments and security dealers play in the functioning of the money market. To discover how Treasury bills and repurchase agreements (RPs) arise through borrowing and lending in the money market. Introduction All the transactions carried out in the financial markets seem to be basically the same: borrowers issue securities that lenders buy. However, the different purposes for which money is borrowed can result in the creation of different kinds of financial assets having different maturities, risks, etc. For instance, the money market is the market for short-term (one year or less) credit. Characteristics of the Money Market The money market is the mechanism through which holders of temporary cash surpluses meet holders | Chapter 10 Introduction to the Money Market and the Roles Played by Governments and Security Dealers Learning Objectives To understand the many roles and functions performed by the money market. To identify the key money market players. To examine the roles that governments and security dealers play in the functioning of the money market. To discover how Treasury bills and repurchase agreements (RPs) arise through borrowing and lending in the money market. Introduction All the transactions carried out in the financial markets seem to be basically the same: borrowers issue securities that lenders buy. However, the different purposes for which money is borrowed can result in the creation of different kinds of financial assets having different maturities, risks, etc. For instance, the money market is the market for short-term (one year or less) credit. Characteristics of the Money Market The money market is the mechanism through which holders of temporary cash surpluses meet holders of temporary cash deficits. The money market arises because for most individuals and institutions, cash inflows and outflows are rarely in perfect harmony with each other, and the holding of idle surplus cash is expensive. Key Borrowers and Lenders in the Money Market Central Banks (supplying funds and information and promoting market stability) Corporate Borrowers & Cash-Management Customers Needing to Invest Cash Surpluses Security Dealers & Brokers Money Center Banks Nonbank Financial Institutions (mutual funds, insurers, etc.) Government Treasuries (borrowing and redeeming securities) Characteristics of the Money Market Characteristics of the Money Market Money market investors seek mainly safety and liquidity, plus the opportunity to earn some interest income. Because funds invested in the money market represent only temporary cash surpluses and are usually needed in the near future, money market investors are especially sensitive to risk. Types of Investment Risk Characteristics
