Q1

Define money market. What are its broad objectives and functions?
How is money marketdifferent from capital markets?
Money Market- A segment of the financial market in which the
financial instruments with the highliquidity and very short maturities
are traded. The money market is used by participants as a means
forborrowing and lending in the short term, from several days to just
under a year. Money marketsecurities consist of negotiable
certificates of deposit (CD), banker acceptance, U.S Treasury
bills,Commercial Paper, Municipal notes, federal funds and repurchase
agreements. There are variousfunctions of money market. 1) To
maintain monetary equilibrium. it means to keep a balance
betweendemand and supply of money for short term monetary
transactions.2 ) To promote economic growth .3) To provide trade and
industry. Money market provides adequate finance to trade &
industry.4) ToHelp in implementing Monetary policy. It provides
mechanism for an effective implementation of themonetary policy. 5)
To help in capital formation. Money Market are used for Short term
basis, usuallyfor assets up to one year conversely capital markets are
used for long term assets, which are any assetwith maturity greater
than one year. Capital market include the equity (stock) market
and debt (bond)market. Together the money and capital
market comprise a large portion of the financial market and areoften
used together to manage liquidity and risks for companies, government
and individuals.Q 2
What is a derivative contract? Explain forward, future and options
contracts.
Derivative Contract- A security whose price is dependent upon or
derived from one or more underlyingasset. The derivative itself is
merely a contract between two or more parties. Its values is
determined byfluctuations in the underlying asset. The most common
underlying assets include stocks, bonds,commodities, currencies,
interest rates and market indexes. Most derivatives are characterized

by highleverage. Derivatives are generally used as an instrument to

hedge risk, but can also be used forspeculative purposes. For example a
European Investor purchasing shares of an American company offan
American Exchange (using U>S dollars to do so) Would be exposed to
exchange rate risk whileholding that stock. To hedge this risk, the
investor could purchase currency futures to lock in
a specifiedexchange rate for the future stock sale and currency
conversion back into euros. Forwards Contracts - Atailored contract
between two parties, where payment takes place a specific time in the
future attoday's pre-determined price. 2) Future Contracts - are
contracts to buy or sell an asset on or before afuture date at a price
specified today.A futures contract differs from a forward contract in
that thefuture contract is a standardized contract written by a
clearing house that operates an exchange wherethe contract can be
bought and sold. 3) Options contracts- are the contracts that give the
owner theright, but not the obligation, to buy or sell an asset. The
prices at which the sale takes place is known asstrike price, and is
specified at the time the parties enter into the option