Understanding Money Markets: Structure, Functions, and Classifications

Money Markets

These markets trade instruments with short-term maturity and high liquidity securities, contrasting with markets that exchange securities with medium- and long-term maturity.

Key Features of Money Markets

Money markets are characterized by:

• A network of interconnected and interrelated markets.
• Trading of financial instruments with short-term maturity and high liquidity due to their short-term nature and active secondary markets.
• Reduced risk of traded securities due to the high creditworthiness of issuers or incorporated collaterals.
• Operation as wholesale markets.
• Tendency to be direct, flexible, and highly innovative.

Functions of Money Markets

Monetary Policy Implementation

Money markets facilitate the implementation of monetary policy and contribute to achieving its objectives, which are typically set in terms of:

• Growth of a representative magnitude of the quantity of money.
• Specific interest rate levels.
• Maintaining a certain value of exchange rate or inflation rate.

Interest Rate Structure Formation

Money markets contribute to forming an appropriate interest rate structure by establishing short-term interest rates that serve as a foundation for the overall structure.

Enhanced Financial Decision-Making

Efficient money markets provide information that allows economic agents to understand the market situation, leading to more effective financial decisions.

Resource Allocation and Funding

Money markets facilitate the allocation of financial resources and funding, enabling transactions between intermediaries and individuals.

Classification of Money Market Transactions

Double or Buy-Back Transactions

These involve two simultaneous single transactions: a buy and a sell, one spot and the other forward, or both forward. The buyer in the first transaction becomes the seller in the second, and vice versa.

Single Transactions

These are one-way transactions where securities are sold with all attached rights, including coupon payment and redemption value. Debt is considered transferred to maturity, allowing the new owner to trade freely in the secondary market.