| The money market is a general term for the markets in which banks lend to and
borrow from each other, trade financial instruments such as
Certificates of Deposit (CDs) or enter agreements such
as Repos and Reverses. The market normally trades in maturities
up to one year. It provides short to medium term liquidity in the global financial system. Derivatives of the money market
include forward rate agreements (FRAs) and futures.
Trading takes place between banks in the "money centres" (New York and London primarily, also Chicago, Frankfurt, Paris, Singapore, Hong Kong, Tokyo, Toronto, Sydney).
Common Money Market Instruments
Bankers' Acceptance. A draft or bill of exchange
accepted by a bank to guarantee payment of the bill.
Certificate of Deposit. A time deposit with a specific maturity date shown on a certificate;
large-denomination certificates of deposits can be sold before maturity.
Commercial Paper. An unsecured promissory note with a
fixed maturity of one to 270 days; usually it is sold at a discount from face value.
Eurodollar Deposit. Dollar deposits in a U.S. bank branch or a
foreign bank located outside the United States.
Federal Agency Short-Term Securities (in the US). Short-term securities issued by
federally sponsored agencies such as the
Farm Credit System,
the Federal Home Loan Banks and the Federal National Mortgage
Association.
Federal Funds (in the US). Interest-bearing deposits held by
banks and other depository institutions at the Federal Reserve; these
are immediately available funds that institutions borrow or lend, usually on an overnight basis. They are lent for the federal funds rate.
Municipal Notes. Short-term notes issued by municipalities in
anticipation of tax receipts or other revenues.
Repurchase Agreements. Short-term
loans—normally for less than two weeks and frequently for one day—arranged by selling securities to an investor with
an agreement to repurchase them at a fixed price on a fixed date.
Treasury Bills. Short-term debt obligations of a national
Treasury that are issued to mature in 3 to 12 months.
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