The international money market is a market where international currency transactions between numerous central banks of countries are carried on. The transactions are mainly carried out using gold or in US dollar as a base. The basic operations of the international money market include the money borrowed or lent by the governments or the large financial institutions.
The international money market is governed by the transnational monetary transaction policies of various nations‘ currencies. The international money market‘s major responsibility is to handle the currency trading between the countries. This process of trading a country‘s currency with another one is also known as forex trading.
Unlike share markets, the international money market sees very large funds transfer. The players of the market are not individuals; they are very big financial institutions. The international money market investments are less risky and consequently, the returns obtained from the investments are less too. The best and most popular investment method in the international money market is via money market mutual funds or treasury bills.
Features of International Money Market
- It is a wholesale market, as the transaction volume is large.
- Trading takes place over the telephone, after which written confirmation is done by way of e-mails.
- Participants include banks, mutual funds, investment institutions and Central Banks.
- There is an impersonal relationship between the participants in the money market, and so, pure competition exists.
- Money market operations focus on a particular area, which serves a region or an On the basis of the market size and needs, the area may differ.
- There are five major segments of money market which are Certificate of Deposits (CD), Commercial Paper, Swaps, Repo and Government treasury securities.
Functions of Money Market
The three basic functions of money market are:
- It provides a balancing tool for equating the demand for and supply of short term funds.
- It provides a centre for the intervention of central bank, for controlling liquidity and general interest rate level.
- It provides a proper reach to the suppliers and users of the short term funds, to fulfill their requirements, at a reasonable market clearing price.
Money market plays a vital role in equating the short term liquidity imbalances within the country. Indeed, with the help of this market, the central bank controls liquidity and interest rates level in the country.