Concept
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From the lender’s perspective the priority is to make profit and manage credit risk. The function of the money market is dependent on the perspective we look at it from. From the lender’s perspective, the function that the money market serves is to offer the opportunity for a profitable investment to be made. Accordingly, lenders will seek the highest interest rate possible. This function allows lenders to profit, which they would not be able to do if they kept their money in, say, their safe. Also, as we’ve mentioned previously, this investment is highly liquid. Therefore, if the lender suddenly requires the funds that they have invested in the money markets, it is
relatively easy and fast for them to convert their investment into cash (i.e. to liquidate their investment). Another function of money markets we discussed in Module 1 was that of risk management — although this can amount to many different things in different contexts, here we
should primarily note that lending in the money market can contribute to an intelligent risk management strategy, because of the reasons discussed in our video lecture; that is the low degree of inherent credit risk related to money-market instruments.