Question

Explain the characteristics of Money Market?

Answer 1

1. Short-term Funds: It is a market purely for short-term funds or financial assets called near money.
2. Maturity Period: It deals with financial assets having a maturity period upto one year only.
3. Conversion of Cash: It deals with only those assets which can be converted into cash readily without loss and with minimum transaction cost.
4. No Formal Place: Generally, transactions take place through phone, i.e., oral communication. Relevant documents and written communications can be exchanged subsequently.
5. Sub-markets: It is not a single homogeneous market. It comprises several sub-markets each specialising in a particular type of financing.
6. Role of Market: The components of a money market are the Central Bank, Commercial Banks. Commercial banks generally play a dominant role in this market.
7. Highly Organized Banking System: The Commercial Banks are the nerve centre of the whole money market. They are the principal suppliers of short-term funds.
8. Existence of Secondary Market: There should be an active secondary market for these instruments.
9. Demand and Supply of Funds: There should be a large demand and supply of short-term funds.
10. Wholesale Market: It is a wholesale market and the volume of funds or financial assets traded in the market is very large.
11. Flexibility: Due to greater flexibility in the regulatory framework, there are constant endeavors for introducing new instruments.
12. Presence of a Central Bank: The central bank keeps their cash reserves and provides them financial accommodation in difficulties by discounting their eligible securities.