Concept
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Definition
Similar to financial markets, money markets do not have a universally agreed-upon definition and can be defined in a few different ways. It is therefore a good exercise to consider a few different definitions, paying attention to the themes that are common amongst them, and those that differentiate them.
Here are three definitions that can be found from a simple internet search:
1. “...the money market is where companies, governments and banks raise money by getting short-term loans from investors.” 2. “The money market is where financial instruments with high liquidity and very short maturities are traded. It is used by participants as a means for borrowing and lending in the short term, with maturities that usually range from overnight to just under a year.” 3. “...the money market became a component of the financial markets for assets involved in short- term borrowing, lending, buying and selling with original maturities of one year or less.”
The commonalities between these definitions are not hard to see — short-term lending and borrowing is indeed the central theme of money markets. The first definition emphasizes the types of borrowers and lenders that typically participate in the money markets — which we will pay particular attention to in a later section.
Another noteworthy aspect of these definitions is the idea of buying and selling instruments or assets. It is important to note that money market borrowing, or lending can take place in the form of a financial instrument, which is a contract or agreement of a financial nature. Entering into such a contract gives rise to a certain asset, the asset being the right to trade under the conditions specified in the contract (which are usually cash flows to be determined in some way). Of course, a financial instrument can also give rise to a liability (an asset of negative value) from the perspective of one of the parties to the contract, if it specifies that the party must make payments instead of receiving them.