Wednesday, 20 November 2019

Unit 3: Financial Markets

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                                                            Unit 3: Financial Markets    



A financial market is a market where variety of financial assets are traded directly or indirectly to cater to the diverse saving notions of the savers and numerous investment preferences of the investors, and where financial institutions buy the financial claims of those who have surplus funds and sell their own claims.

The money market is concerned with intermediation of short-term funds from savers to those who need them for meeting their working capital requirements and allocation of the funds in an efficient manner among competing uses in the economy, thereby contributing to growth through increased investment and through enhanced efficiency in resource utilisation.

By nature, the transactions that take place in the money market are of high volumes, involving large amounts.

Hence, the market is dominated by a relatively small number of large players.

Market Makers (Primary Dealers, etc.

)    Discount houses perform the function of discounting/rediscounting the commercial bills and T-Bills.

On the other hand, acceptance houses are specialized agencies which accept the bills of exchange on behalf of their clients for a commission.

An active bill market becomes a prerequisite for the services of the discount and acceptance houses.

In addition, some of these intermediaries act as underwriters to the government securities and also have the option to be their market makers.

The various money market players, can be segregated into different categories based on their activity in the market, i.e., they can be only lenders, lenders and borrowers/issuers, investors or intermediaries.

Certain players may have more than one role to play.

Acceptance Houses: Are specialized agencies which accept the bills of exchange on behalf of their clients for a commission.

Bill Market: Is a market where short-term papers or bills are traded.

These bills include bills of exchange and treasury bills.

Call/Notice money market: Is a market where the day-to-day surplus funds, mostly of banks are traded.

Commercial Bill: It is an instrument used in the Indian money market to finance the movement and storage of agricultural and industrial goods in domestic and foreign trade.

Commercial Paper: It enable highly rated corporate borrowers to diversify their sources of short-term borrowing and also to provide an additional instrument to investors.

Derivative Promissory Notes: Under this instrument, banks were permitted to issue derivative usance promissory note for a period not exceeding 90 days under the strength of underlying bills.

Discount Houses: It performs the function of discounting/rediscounting the commercial bills and T-Bills.

Money Market: Is a market for short-term funds and covers money and financial assets that are close substitutes for money.

Repo: It refers to a transaction in which a participant acquires fund immediately by selling securities and simultaneously agreeing for repurchase of the same or similar securities after specified period of time at a given price.

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