MONEY MARKET
As money became a commodity, the money market became a component of the financial markets for assets involved in short-term borrowing, lending, buying and selling with original maturities of one year or less. Trading in the money markets is done over the counter, is wholesale. Various instruments exist, such as Treasury bills, commercial paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-, and asset-backed securities.
It provides liquidity funding for the global financial system. Money markets and capital markets are parts of financial markets. The instruments bear differing maturities, currencies, credit risks, and structure. Therefore they may be used to distribute the exposure.
The money market developed because parties had surplus funds, while others needed cash. Today it comprises cash instruments as well.

Functions of the money market * transfer of large sums of money * transfer from parties with surplus funds to parties with a deficit * allow governments to raise funds * help to implement monetary policy * determine short-term interest rates

Money market organizations * Trading companies often purchase banker’s acceptance to be tendered for payment to overseas suppliers. * Retail and institutional money market funds * Banks * Central banks * Cash management programs * Merchant Banks

Common money market instruments * Certificate of deposit - Time deposit, commonly offered to consumers by banks, thrift institutions, and credit unions. * 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. * Commercial paper - Unsecured promissory notes with a fixed maturity of one to 270 days; usually sold at a discount from face value. * Eurodollar deposit - Deposits made in U.S. dollars at a bank or bank branch located outside the United States. * Federal agency short-term securities - (in the U.S.). Short-term securities issued by government sponsored enterprises such as the Farm Credit System, theFederal Home Loan Banks and the Federal National Mortgage Association. * Federal funds - (in the U.S.). 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 - (in the U.S.). Short-term notes issued by municipalities in anticipation of tax receipts or other revenues. * Treasury bills - Short-term debt obligations of a national government that are issued to mature in three to twelve months. * Money funds - Pooled short maturity, high quality investments which buy money market securities on behalf of retail or institutional investors. * Foreign Exchange Swaps - Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future. * Short-lived mortgage- and asset-backed securities

The money market offers a variety of securities with maturities that range from a few days to 1 year. Overall, these are safe investments. Here’s a brief description of this market's principal instruments.

Treasury bills * Treasury bills, or T-bills, are the most marketable money market securities. Governments issue them to borrow money for a short period. * T-bills are issued with maturities that range from 1 month to 1 year. They’re sold at a discount, i.e., the government sells them for less than par value (face value) and, when they mature, buys them back at par value. * In practice, the interest you receive is the difference between the purchase price and what you get at maturity. In other words, if you pay $9,800 for a T-bill with a face value of $10,000 and keep it until maturity, you’ll earn $200 in interest. * T-bills are very popular because they’re one of the few affordable money market instruments. They’re usually issued in denominations of $1,000, $5,000, $10,000, $25,000, $50,000, $100,000 and $1 million. Note that brokers generally require a minimum purchase of $10,000. * T-bills (and other Treasuries) are considered to be the safest investments in the financial market because governments back them. * However, their exceptional safety means a lower return than provided by corporate bonds, certificates of deposit and money market funds. Also, you don’t automatically get back all of your investment if you cash out your T-bills before the maturity date.

Commercial paper * Many corporations prefer, as much as possible, to avoid borrowing short-term money from banks. Therefore, they use commercial paper. * Commercial paper is an unsecured short-term debt instrument issued by a corporation. On average, maturities range from 1 to 2 months and are usually no longer than 9 months. Commercial paper is issued at a discount, reflecting current market interest rates. * Commercial paper provides a better return than T-bills, as corporations have a higher risk of default than governments do. * Commercial paper is usually issued in denominations of $100,000 or more. As a result, smaller investors can only access commercial paper indirectly, through their broker or money market funds.

Bankers' acceptances * A banker's acceptance (BA) is a short-term debt instrument issued by a corporation. In fact, BAs are commercial papers that are secured by a bank. * Corporations use banker's acceptance to finance imports, exports and other merchandise transactions. Bankers' acceptances are especially useful when the creditworthiness of a foreign trade partner is unknown. * Banker's acceptances are traded at a discount from face value and can be sold in the secondary market prior to maturity. Of course, in that case, their return isn’t guaranteed.

Eurodollars * Eurodollars are U.S. dollar-denominated deposits at banks located outside the United States. They’re called Eurodollars because they first appeared in Europe (in London, in 1957, to be precise), but they can be held anywhere outside the United States. * As Eurodollars are held outside the United States, they’re not subject to the rules of that country's central bank. They aren’t as liquid as term deposits held in the United States but provide greater return. * Eurodollar deposits are valued in the millions and have maturities of less than 6 months. Individuals can therefore only buy them indirectly, through a money market fund.

Repurchase agreements * Repurchase agreements are also known as repos. Corporations and others use them as a form of very short-term borrowing (overnight). With a repurchase agreement, an institution temporarily transfers the securities to a lender as collateral, in exchange for liquidity. The securities act as collateral on the loan. * A repo involves 2 transactions that are staggered over time, with the second transaction reversing the first. A dealer or other holder of government securities sells the securities to a lender and agrees to repurchase them on a given date at a given price. The maturities are usually very short, ranging from 1 to 30 days, but can be longer. * Their very short maturities and government backing mean that lenders incur little risk. Repos are very popular as they can eliminate credit problems. Unfortunately, they have led to major fraud when backed by unreliable assets. Lenders have lost a lot of money because they didn’t sufficiently verify the validity of the collateral offered to them.

There are several variations on repos: * Reverse repurchase agreement. This is the opposite of a repo, in which a dealer buys government securities from an investor and sells them back later at a higher price. * Term repo. The principle is the same as a repo, but the term is more than 30 days.