Financial Management

Submitted By-
Bharat Matani Gita Azad
Devangi Katiyar Govind Masakara
Ekta Sharma Hardik Bajaj
Submitted To-
Rishab Gandhi Ritik Saxena
Prof. Rajesh Mishra
 Demand and Supply of Money
• The demand for money refers to the total amount of wealth held by the households
and companies. The demand for money is affected by several factors such as
income levels, interest rates, price levels (inflation),and uncertainty.
• The impact of these factors on the demand for money is explained in terms of the
three primary reasons to hold money. The three reasons are:
1. TRANSACTIONS: This is the money needed for fulfilling transactions. As the
total number and size of transactions increases in an economy, the transaction demand
for money also increases.
2. PRECAUTIONARY: This is the money needed for uncertain
future needs, for example, unexpected medical expenses. The
precautionary demand for money increases as the size of economy
increases.
3. SPECULATIVE: People also hold money for speculative
purpose so that they can take advantage of investment
opportunities in future.
 Supply of Money

• The supply of money in an economy is controlled by its central bank, for

example, Fed which change the money supply by using open market
operations or by changing reserve requirements.
• If the current returns on financial products are high, people will rather invest
than hold money with a speculative motive. We can say that the demand for
money for speculative motive increases with the increase in perceived risk in
other financial instruments.
• There is inverse relationship between the short term rates and the demand for
money that household and firms want to hold. If the interest rates are low , the
demand for money is high and if the interest rates are high, the demand for
money is low. This is because as interest rates increase, the opportunity cost of
holding money increases, and people will be better off by investing in other
financial instruments than holding money.
 Structure of Money Market in India

• Broadly speaking, the money market in India comprises

two sectors-
1. Organised Sector
2. Unorganised Sector
Organised Sector
 Ready forward contract(REPO)
• Refers to a transaction where two parties mutually agree to purchase and sell the
same assets or security.
• The repo rate exceeds the reserve repo rate by 1%
Money market mutual funds
• Lowest risk debt funds
• Liquid funds primarily invest in money market instruments with a
maturity of up to 91 days.
 Interest Rate Swap
• Interest rate swaps are the exchange of one set of cash flows for another
usually involve the exchange of fixed rate for a floating rate.
INTER BANK TERM MONEY
• Is also called over night rate.
Entities are not allowed to lend beyond 14 days
 Who Demands and Who Supplies in
Financial Markets?

• The price is what suppliers receive and what demanders pay.

• In financial markets, those who supply financial capital through saving expect
to receive a rate of return.
• One of those who demand financial capital by receiving funds expect to pay
a rate of return.
• This rate of return can come in a variety of forms, depending on the type of
investment.
 Shifts in Demand and Supply in Financial
Markets

• Those who supply financial capital face two broad decisions: how much to
save, and how to divide up their savings among different forms of financial
investments.
• Participants in financial markets must decide when they prefer to consume
goods: now or in the future. Economists call this Intertemporal Decision
Making.
• Most workers save for retirement because their income in the present is
greater than their needs, while the opposite will be true once they retire.