Learning ACCA FM is a series of article briefing selected topics to be tested in ACCA FM exam. We try to use a simple and easy-to-understand way to present.
In this short article, we talk about money market.
Characteristics of Money Market
It is where financial instruments with high liquidity and short maturities (< 1 year) are traded, no physical location exists;
Purpose: Short term financing (for who selling the instruments) and short term investment (for who buying the instruments), maturity less than 1 year;
Participants: Banks, local authorities, building societies and companies;
Instruments: Negotiable Certificates of Deposit (CDs), Bankers Acceptances, U.S. Treasury Bills, Commercial Paper, Repurchase Agreements.
Money Market Instruments Risk Profile
The risk of money market instruments varies from very low risk (e.g. U.S. Treasury Bills) to high risk (e.g. commercial paper). In general, collateral-backed instruments such as Repurchase Agreement have lower risk than those without any security as collateral. Although the maturity is very short, seller of money market instruments requires to discount the face value of the instruments in order to have buyers interest.
ACCA FM Exam
Money market is quite often to be seen in Section A of ACCA FM exam. Even only 1 or 2 questions are seen in Section A, the basic understanding is enough to answer them correctly. When you are in the marginal range, 2 mark is critical for you to pass the exam!
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