Money Market :
In most countries, local corporations commonly need to borrow short term funds to support their operations. Country governments may also need to borrow short term funds to finance their budget deficits. Individual or local institutional investors in those countries provide funds through short term deposits at commercial banks. In addition, corporations and governments may issue short term securities that are purchased by local investors. Thus, a domestic money market in each country serves to transfer short term funds denominated in the local currency from local surplus units (savers) to local deficits (borrowers)
The growth in international business has caused corporations or governments in a particular country to need short term funds denominated in a currency that is different from their home currency. First, they may need to borrow funds to pay for imports denominated in a foreign currency. Second, even if they need funds to support local operations, they may consider borrowing in a currency in which the interest rate is lower. This strategy is especially desirable if the firms will help receivables denominated in that currency in the future. Third, they may consider borrowing in a currency that will depreciate against their home currency, as they would be able to repay the loan at a more favorable exchange rate over time. Thus the actual cost of borrowing would be less than the interest rate of that currency.
More about Money Market:
Meanwhile, there are some corporations and institutional investors that have motives to invest in a foreign currency rather than their home currency. First, the interest rate they would receive from investing in their home currency may be lower than what they could earn on short term investments denominated in some other currencies. Second, they may consider investing in a currency that will appreciate against their home currency because they would be able to convert that currency into their home currency at a more favorable exchange rate at the end of the investment period. Thus, the actual return on their investment would be higher than the quoted interest rate on that foreign currency.
The preferences of corporations and governments to borrow in foreign currencies and of investors to make short term investments in foreign currencies resulted in the creation of the international money market.
Origin and Development:
The international money market includes large banks in countries around the world. Two other important components of the international money market are –
- The European money market and
- The Asian money market.
European money market:
The origins of the European money market can be traced to the Euro currency market that developed during the 1960s and 1970s. As MNCs expanded their operations during that period, international financial intermediation emerged to accommodate their needs. Because the U.S. dollar was widely used even by foreign countries as a medium for international trade, there was a consistent need for dollars in Europe and elsewhere. To conduct international trade with European countries, corporations in the United States deposited U.S. dollars in European banks. The banks were willing to accept the deposits because they could lend the dollars to corporate customers based in Europe. These dollar deposits in banks in Europe came to be known as Eurodollars, and the market for Eurodollars came to be known as the Eurocurrency market.
Asian Money Market:
Like the European money market, the Asian money market originated as a market involving mostly dollar denominated deposits. Hence, it was originally known as the Asian dollar market. The market emerged to accommodate the needs of businesses that were using the U.S. dollar as a medium of exchange for international trade. These businesses could not rely on banks in Europe because of the distance and different time zones. Today, the Asian money market, as it is now called, is entered in Hong Kong and Singapore, where large banks accept deposits and make loans in various foreign currencies.