Gujarat BoardEnglish MediumSTD 12 CommerceOCMFINANCIAL MARKET5 Marks
Question
What is money market? State its characteristics.
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Answer
Money market:
Money market refers to a section of financial market where financial instruments $($assets$)$ with high liquidity and short-term maturities are traded. It is a market for assets or instruments which are close substitutes for money.
Financial assets traded in money market include treasury bills, certificate of deposits, call money, money via. money lenders, pawn, indigenous bankers, shroffs, etc.
Money is borrowed and lent for a short term. Securities or financial assets having a maturity period of one year or less are traded in this market.
It is important to note that unlike stock exchange, money market is not a physical location, but group of various institutions trading or dealing in money.
Transaction takes place between two parties. One is lender and the other is borrower.
Reserve bank, commercial banks, co-operative banks, shroffs, etc. are mainly included in the group of money lenders, while individuals, business enterprises, farmers, traders, state governments, central government are the borrowers of money.
Characteristics of money market:
Money market is divided into two parts. They are:
$(a)$ Organized money market and
$(b)$ Unorganized money market.
Money market is a market for short term assets or instruments, whose maturity period is one year or less.
Credit worthiness of participants in money market is important so that both the borrower and lender can trade at ease.
Money market is not a fixed physical location but a collective structure of various institutions like Reserve Bank of India, commercial banks, financial institutions, mutual funds, insurance companies, indigenous bankers, shroffs, etc.
It is a market of financial instruments which can easily be converted into cash $($i.e. are highly liquid$).$ For example, treasury bills, call money, etc.
Sub-branches of money market also develop with economic and technological development, such as call money market, bond market, treasury bills market, etc.
Most of the financial instruments are debt instruments. Element of risk is less as compared to other financial instruments.
The success and operation of money market depends on the banking system and financial institutions.
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