Money Market free essay sample

As money market is very important to the financial system, especially the economic growth, there is need to review and understand the changes in the money market so that the right responses can be given while confronting with the financial crisis. The objectives of this project are to review the money markets and the securities in Malaysia and to understand an importance of money markets that affect the economic growth. Firstly, the purpose of the existence money market and its cost advantage is discussed. Next, the money market’s instruments are reviewed. The money market’s instruments include treasury bills, Bank Negara funds, Repurchase Agreement, Negotiable Certificates of Deposit and Banker’s Acceptance. Those money market’s instruments are essential to volatile the liquidity of financial status in Malaysia. In addition, the money market securities are compared using the interest rates as the interest rates are the key factor to stimulate or constrain the economic activities. We will write a custom essay sample on Money Market or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The significant of this study is to make a deep understanding of the money market in Malaysia. This study can help the finance students to learn more about the relationship between the money market and the economic growth. It is very useful when involving in the businesses of money market. Based on the study, we can see that there is vital to have money market securities in helping the economic growth. Different money market securities can help to provide a low-cost source of funds to the firms, government and especially to the intermediaries instead of depend on the banks only. Money market is a market for trading short-term, low risk securities such as commercial paper, treasury bills, bankers’ acceptances, and negotiable certificates of deposits. The market is made up of dealers in these securities who are linked by electronic communications. The most important function of a money market is to provide a means whereby economic units can quickly adjust trough cash positions. For all economic units (business, households, financial institutions, or governments) the timing of cash inflows is rarely perfectly synchronized or predictable in the short run. According to the data provider Morningstar Asia Ltd, money market – linked funds registered for sale in Malaysia were the best performing asset type in comparison with commodity and equity funds for the year ended October 31. On average, money market funds delivered positive returns (2. 19%) over the period compared with commodity and equity-linked funds, which registered negatives returns. Morningstar told Star Biz that as a result of the uncertain global economic climate, investor risk appetites has been sharply reduced. Higher risk asset classes, such as equities and commodities, typically performed poorly in such an environment, while perceived safe harbors- such as money market linked-funds- generally did better. Furthermore, OSK- UOB Unit Trust Management Bhd. and Meridien Asset Management Sdn. Bhd. had invested in short-term commercial paper with top credit quality, hence sheltering it from the volatility associated with the bond market and to preserve capital and to generate consistent income streams. In addition, Managing director Nicholas Ng of Meridien Asset Management Sdn. Bhd. xpected that the stability to continue in the money market, given recent steps taken by Bank Negara to strengthen confidence in the financial system. Also, current account surplus and ample liquidity in the banking system should continue to provide support for the money market. In conclusion, short-term rates on the Malaysian money market remained steady at the opening despite continued ample liquidity in the system as Bank Negara Malaysia intervened to check excess liquidity in the system. On October 23, Bank Negara Malaysia (BNM) today estimated an aggregate surplus of RM 4. 4 billion, of which conventional operations accounted for RM1. 658 billion while Islamic funds made up for the remaining RM2. 781 billion. 3. 0 MONEY MARKET 3. 1 Why do we need money market? In theory, the money markets should not be needed. The banking industry exist primarily to provide short term loans and to accept short term deposits. Bank should have efficiency advantage in gathering information, an advantage that should eliminate the need for the money markets. Banks should be able to offer loans more cheaply than diversified markets, which must evaluate each borrower every time a new security is offered. The banking industry exists primary to mediate the asymmetric information problem between saver-lenders and borrower-spenders, and banks can earn profits by capturing economies of scale while providing this service. However, the banking industry is subject to more regulations and governmental costs than are the money markets. In the situation where the asymmetric information problem is not severe, the money markets have a distinct cost advantage over banks in providing short term funds (Mishkin, S. F, Eakins G. S, 2009). 3. 2 Money market cost advantage Banks must put aside a portion of their deposits in the form of reserves that are held without interest at the Bank Negara. Thus, a bank may not be able to invest 100% of every ringgit it holds in deposits. This means that it must pay a lower interest rate to the depositors than if the full deposit could be invested. Interest rate regulations were a second competitive obstacle for banks. One of the principal purposes of the banking regulations in the 1930s was to reduce competition among banks. With less of competition, regulators felt, banks were less likely to fail. The cost to consumers of the greater profits banks earned because the lack of free market competition was justified by the greater economic stability that a healthy banking system would provide. One way that banking profits were assured was by regulations that set a ceiling on the rate of interest that banks could pay for funds (Mishkin, S. F, Eakins G. S, 2009). 3. 3 The Purpose of Money Markets Money market securities are usually sold in the large denominations. Normally the amount is exceeding than RM1, 000,000. The main participants in this area are Bank Negara Malaysia, Commercials banks, finance and investments firms and also rich individuals. Normally, the money market has lower default risk. This is because it matures in one year and less depending on those types of instruments. Nowadays, the money markets are established in order to save the surplus funds in that party holds and they do not want to use it yet. Hence, it will give a higher return for an individual who is save their money in this market area. This return is not as high as an individual can get if they are purchasing the bond. But, it is high if we compare the value that an individual can get if they hold the money by their own or simply deposits the money in any banks around this country or around the world. The money market also acts in between because it is not risky and safer and at the same time it gives additional amount towards the surplus money. It is the place where an individual avoid from riskier investment by purchasing the bonds. As we know, bonds are very risky investment even though it gives higher interest rates to the bondholders. Besides, money market also is established to provide a low-cost source of funds.