Financial Markets Financial markets play a crucial role in the economy by facilitating the exchange of financial assets such as stocks, bonds, currencies, and derivatives. They provide a platform for individuals, businesses, and governments to raise capital, invest savings, manage risks, and conduct various financial transactions. Let's explore the classification of financial markets: Money The money market is a short-term debt market where financial instruments renee with high liquidity and low risk are traded, It serves as a platform for borrowing larket and lending money for a short duration, usually less than one year. The money market helps in managing short-term liquidity needs, enabling participants to t 4 earn interest on their excess funds. apy Examples of money market instruments include Treasury bills, certificates of deposit, commercial papers, and repurchase agreements (repos) The capital market is a long-term debt and equity market where businesses Capital and governments raise funds for investment and expansion. It consists of two segments: the primary market and the secondary market. Market ay The primary market is where new securities are issued and sold to investors through initial public offerings (IPOs) or bond offerings. The secondary market ia involves the trading of previously issued securities between investors, such as Ss buying and selling shares on stock exchanges. Derivatives The derivatives market involves the trading of financial contracts whose value is derived from an underlying asset. These contracts include options, futures, Market swaps, and forward contracts. Derivatives are used to manage risks, speculate on price movements, and hedge against adverse market conditions. $ For example, a farmer can use futures contracts to lock in a future price for their crops, thereby reducing the risk of price fluctuations, The derivatives market provides liquidity, enhances price discovery, and enables participants to manage their exposure to various financial risks. The foreign exchange (forex) market is where currencies are bought and sold. It Foreign is a decentralized market where participants, including banks, corporations, governments, and individuals, exchange one currency for another. Exchange Market The forex market facilitates international trade and investment by enabling the conversion of currencies and managing exchange rate risks. It is the largest and most liquid financial market globally, with daily trading volumes in trillions of dollars.What are Securities ? Securities refer to financial instruments that represent ownership or a creditor relationship with an entity. They are commonly issued and traded in financial markets. Securities can be categorized into three main types: equity securities, debt securities, and derivative securities. Types of Secutities: Role of Securities in Financial Markets: Equity Securities: Equity securities represent ownership in a company and provide shareholders with a claim on the company's assets and earnings. The most common type of equity security is common stock, which entitles the holder to voting rights and a share of the company's profits. Example: ABC Corporation issues common stock to raise capital. Debt Securities: Debt securities represent loans or bonds issued by governments, municipalities, or corporations to raise capital. Investors who purchase debt securities become creditors and are entitled to receive periodic interest payments and the return of a principal amount at maturity. Example: XYZ Municipality issues municipal bonds to fund infrastructure projects. Securities play a crucial role in financial markets by facilitating the transfer of capital, allocating risk, and enabling investment opportunities. Capital Formation: Securities allow companies, governments, and other entities to raise capital for various purposes, such as funding growth, financing projects, or meeting financial obligations. Investment Opportunities: Securities provide individuals and institutional investors with opportunities to invest their funds and potentially earn returns through dividends, interest payments, or capital appreciation. Risk Management: Securities, particularly derivative securities, enable investors to manage and hedge against various types of risks, such as price volatility, interest rate fluctuations, or currency exchange rate risks. Market Liquidity: Securities traded in financial markets enhance market liquidity by providing investors with the ability to buy or sell assets easily This liquidity promotes efficiency in price discovery and facilitates the flow of capital.* What is a Money Market? The money market is a segment of the financial market where short-term borrowing and lending of funds take place, involving highly liquid and low-risk instruments with maturities of one year or less. Its purpose is to facilitate the efficient allocation of short-term funds and provide liquidity to participants. Importance of the Money Market in the Overall Financial System: Examples: Relative distribution of various money market instruments: The money market holds significant importance in the overall financial system due to the following reasons: * Liquidity Management: The money market provides a platform for managing short-term liquidity needs, allowing entities to invest surplus funds in highly liquid instruments and easily convert them into cash when required. * Short-Term Financing: It enables borrowers to meet their immediate funding requirements, such as operational expenses, cash flow gaps, or unforeseen financial obligations. + Interest Rate Benchmarking: The money market plays a crucial role in establishing interest rate benchmarks that influence the cost of borrowing for various financial products, including bank loans, corporate bonds, and mortgages. * Risk Mitigation: Participants can invest in money market instruments with relatively low risk. These instruments, backed by the creditworthiness of issuers, offer a safer investment option compared to long-term investments. L.Money market instruments include Treasury bills, certificates of deposit (CDs), commercial paper, and repurchase agreements (repos). 2.A government treasury bill is a common money market instrument that helps the government raise short-term funds to cover budgetary gaps. 3.Commercial paper is a short-term debt instrument issued by corporations to meet their immediate financing needs. 4.Money market mutual funds are investment vehicles that pool funds from individual and institutional investors to invest in money market instruments, providing them with a low-risk and easily accessible investment option. Repurchase Agreements (Repos) ‘Commercial Paper Tresury ils ‘45% Certitieates of Deposits 30% Hablighting the prevalence of treasury bills and certificates of deposit as the dominant instruments in the market. 3co Participants in the Money Market: aM 1. Central Banks: * Central banks play a crucial role in the money market by implementing monetary policy and regulating money supply. * They conduct open market operations, buying and selling government securities to control interest rates and stabilize the economy. 2. Commercial Banks: * Commercial banks participate in the money market to manage their short-term liquidity needs. * They can borrow or lend funds in the money market to meet reserve requirements or optimize their cash positions. 3. Corporations: * Corporations often invest their excess cash in money market instruments to earn a modest return while maintaining liquidity. * They may issue commercial paper to raise short-term funds from the money market. Mutual Funds: * Money market mutual funds pool funds from individual investors and invest in various money market instruments + They offer individuals a convenient way to invest in the money market while providing liquidity and stability. Money Market Interest Rates: * Money market interest rates are the rates at which money market instruments are bought and sold. «They serve as a benchmark for short-term borrowing and lending costs in the financial system. * The primary money market interest rates include the federal funds rate, the London Interbank Offered Rate (LIBOR), and the Treasury bill yield. Influence on the Broader Economy: Money market interest rates affect the broader economy in several ways: * They impact borrowing costs for individuals and businesses, influencing spending and investment decisions. * Changes in money market rates can influence the cost of short-term financing, such as mortgages, auto loans, and corporate loans. + Central banks use money market rates to implement monetary policy and manage inflation and economic growth. + Fluctuations in money market rates can reflect changes in market sentiment and liquidity conditions.Characteristics of Money Market: The following table provides an overview of common money market instruments and their characteristics: Money Market eras Maturity Issuer Example Treasury Bills Less than 1 year Government US. Treasury Bills Coe 1-270 days Corporations Shorr Paper promissory notes Certificates of Deposit 4 month - 1 year Banks Time deposits Repurchase Peat Financial Collateralized Agreements ys Institutions short-term loans U.S. Tr Treasury Notes 1-10 years Government reasury Notes ATT * Anon-financial corporation, ABC Manufacturing, needs short-term financing to meet its working capital requirements. * It decides to issue commercial paper, a common money market instrument. * ABC Manufacturing offers a 180-day commercial paper to investors with a competitive interest rate. * Financial institutions, such as commercial banks and money market funds, purchase the commercial paper as a low-risk investment option with a relatively higher yield compared to other short-term alternatives * By investing in money market instruments, ABC Manufacturing successfully meets its short-term funding needs while providing an attractive investment opportunity for market participants.CO GMT ACADEMY Crack dream jobs with A = Top rated Investment If you want to © Banking, Custodians Transform a & Fund Accounting yout Online Certified Courses on Upskiling for Professionals from world class Industry Experts. -s Register Now © + 91-738 eo Gmtacademy6 @ gmail.com Shivraj Trainer & Life Coach Shivra} is one of the highly professional trainer in field of Investment banking , Fund | accounting and Capital market space . 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