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Many finance novices confuse the currency market with the money market. These two, are in fact, very different concepts with different functions. This article will demystify the differences between the currency market and the money market. First, let’s understand the definition of these terms.
The money market is simply trading in short-term debt instruments. It entails a continual flow of cash between corporations, governments, banks, and financial institutions that engage in borrowing and lending for terms ranging from a single night to up to a year.
A money market is an adequate place for individuals, banks, companies, and governments to park their cash for short periods. Money markets intend to enable businesses and governments to get their hands on liquid money quickly and reasonably. When an organization issues short-term debt, it is typically to cover working capital, not for capital improvements or large-scale projects.
The returns on money markets are modest but at the same time, the risks are low. Instruments used in the money markets include deposits, collateral loans, acceptances, and bills of exchange.
The currency market, also known as the foreign exchange market, is a marketplace where different currencies are bought and sold by different participants from different parts of the globe. This market plays an eminent role in the conduct of international trade.
Currency market serve companies and individuals by permitting them to purchase and sell goods or services in foreign currencies as well as enable a smooth flow of capital. Currency markets operate 24*7 and involve major participants such as large international banks, corporations, government entities, and retail participants.
Members enter the currency market with different objectives in mind and together they make the market more liquid and efficient. Largely, these markets are the drivers of the dynamic global economies.
It is noteworthy that the currency market is not a single market exchange but instead, a network of global markets. These global markets do not work simultaneously but work as per their time zones – starting with Japanese markets followed by Hongkong, Singapore, India, Bahrain, Europe, United Kingdom, USA, Canada, and ending with Australia.
It is the process of converting from one currency to another. Currency conversion requires only two steps. The first is identifying the exchange rate.
Exchange rates tell you how much one currency is worth in another. For example, if you have INR 2000 and you plan to go to the USA, then the exchange rate will tell you how much your INR 2000 is worth in US Dollars. Sometimes, you may end up with more money, and otherwise, you may find yourself with less money. This is purely dependent on the exchange rates prevailing at the time. This conversion is usually governed by commercial banks.
There are several different types of money market instruments that are traded in the money market. These are:
The money market offers a high degree of security and relatively lower rates of return. And the foreign exchange market is a massive global market that offers opportunities but is equally risky. You can choose to invest or trade in either market based on your financial requirements and goals.
The call money market is an important part of the Indian Money Market. This is where the day-to-day surplus funds of banks are traded. The money that is lent for one day in this market is known as “Call Money”.
A currency carry trade is a financial strategy wherein a high-yielding currency funds the trade with a low-yielding currency. A trader uses the currency carry trade to leverage the difference between the exchange rates, which can often be substantial, to their gain.
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