Question

How do money markets fit into a corporations investment strategy? How do corporations use money markets in their daily operations? How do the use of money markets differ between corporations and individuals?

Answer 1

Money market is where the financial instruments with high liquidity and with very short maturities ( from overnight to just under a year)are traded. Corporations require such instruments which are highly liquid and provide cash as and when needed for short term borrowing and lending at nominal risk. Money markets maintain a balance between the demand and supply of short term funds.

Trade Financing- Modern day money markets play a vital role in ensuring that there is adequate capital available to the institutions engaged in domestic as well as international trade. internationally, short term funding for ventures may be available to the traders through" bills of exchange" apart from other routes. These are the instruments that are discounted by the bill market.In common practice, discount markets and acceptance houses are engaged in financing overseas trading ventures using these bills of exchange.

INDUSTRIAL FINANCING- Many comapnies issue bonds on the bond market or shares on the stock market in order to receive long term funds for their operations. There are two ways in which money markets help with industrial financing-providing short term funding and producing an impact on capital markets. short term funding from money markets can help industries finance day to day operations and meet working capital requirements using commercial papers, finance bills, certificate of deposits etc.long term capital is obtained by industries through issue of bonds or shares on applicable capital market.

PROFITABLE INVESTMENTS-The money market offers corporations a lucrative low risk route to use their excess funds in order to earn additional income so that it can ensure that they have sufficient liquidity to meet uncertain demands( acceptance of any new order, repayment of loans, payment to suppliers, meeting government norms, unexpected litigations, trade association demands etc.)

FINANCIAL MOBILITY- By faciliating the transfer for funds from one sector to another, the money market helps in finacial mobility which is necessary for the development of commerce and industry in an economy.

Large corporations with short term cash flow needs can borrow from the market directly through their dealer while individual investors who want to profit from money markets can invest through their money market bank account or a money market mutual fund.

Money markets are wholesale markets that are designed to provide and accept bulk orders, thus retail investors will have to choose to invest in debt mutual funds that invest in money markets in order to invest in this market.