Money markets

DISCUSSION 1. What is a market?

2. What types of markets do you know?

3. What do you know about money markets?

reading THE MONEY MARKET

The money market comprises the demand for money and the money supply. The equilibrium in the money market is such a state of balance when the demand for money from households and businesses is satisfied by the quantity of the money supplied. The equilibrium in the money mar­ket is reached by changing bond prices.

People can hold their wealth in various forms - money, bonds, equities, and property. For simplicity we assume that there are only two assets: money, the medium of exchange that pays no interest, and bonds, which we use to stand for all other interest-bearing assets that are not directly a means of payment. As people earn income, they add to their wealth. As they spend, they deplete their wealth. How should people divide their wealth at any instant between money and bonds to gain the best profits possible and not to incur losses?

There is an obvious cost of holding money. The opportunity cost of holding money is the interest one would have gained if he/she had held bonds. It naturally follows that people will hold money rather than bonds only if there is a benefit to offset this cost, only if holding money is more profitable than holding bonds. It may happen only when interest rates on bonds are too low to make it profitable to hold bonds.

Suppose the money market is in equilibrium when the interest rate on interest-bearing assets (e.g. Treasury bills and other securities) is 6% and the amount of money demanded is $200 mln. Now suppose the interest rate goes down, say, to 4%. In this case interest-bearing assets are no longer profitable as they can't earn a sufficient return. Hence the demand

%

PART II. FINANCE

for money will rise and will lead to a temporary lack of money in the money market. If they lack money, households and businesses are likely to sell bonds they possess for cash. That will cause an increase in the bond supply, which lowers bond prices and rises interest rates on interest-bear­ing assets. With a higher interest rate the amount of money people are will­ing to have in hand will decrease again. Consequently, the money supply will adjust to a current demand to reflect a new higher interest rate.

Conversely, the increase in the money supply creates its temporary sur­plus, which results in the demand for bonds and bond prices going up. The interest rate falls thus restoring balance in the money market, but at a new lower interest rate.

tOCABULARY equities (syn. ordinary shares, equity

N OTES shares, ordinary stocks) - звичайні акції

to deplete - виснажувати, вичерпувати

to incur - наражатися

opportunity costs - 1) найвищий дохід по

альтернативному виду інвестицій;

2) альтернативні видатки володіння

грошима

obvious - очевидний

to offset - відшкодовувати

Treasury bills - казначейські векселі

consequently - отже, тому

conversely - навпаки

temporary surplus - тимчасовий

надлишок

EXERCISES

Answer the following questions:

1. What is the equilibrium in the money market? How can it be reached?

2. Explain in your own words the term "opportunity costs'.' What is the opportunity cost of holding money?

3. How does the money market work?

II. Suggest Ukrainian equivalents to the following expressions:

• interest-bearing assets are no longer profitable

• to sell bonds they possess for cash

• the supply will adjust to the current demand

• we use to stand for all other interest-bearing assets

• thus restoring balance

III. Replace the parts in italics by synonyms:

to offset this cost; equities; equilibrium; to go down; to earn income.

IV Fill in the gaps with the words and expressions from the text.

1. The money market comprises___ and___.

2. The equilibrium in the money market is such____ when the demand for money from _

is satisfied by the quantity of___.

3. The equilibrium in the money market is reached by_____.

4. Money is the medium of__ that___.

5. We use bonds to stand for all other____ that are not directly____.

6. As people earn income, they____ their wealth. As they spend, they____ their wealth.

7 __ of holding money is the interest one____ if he (she)___ bonds.

8. People will hold money rather than bonds only if holding money is_____ than holding

bonds, that is when___ on bonds are___ to make it profitable to

9. In case the interest rate goes down____ are no longer profitable as they can't____.

10. The demand for money will rise and will lead to____ in the money market.

11. If they lack money, households and businesses are likely to____ they possess___.

12. If there is an increase in the bond supply, it will____ bond prices and___ interest rates

on__.

UNIT 3. MONEY MARKETS

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13. The money supply will___ to a current demand to___ a new higher interest rate.

14. The increase in the money supply creates its____, which results in___.

V Find in the text English equivalents for the following.

Рівновага грошового ринку; тимчасовий брак (надлишок) грошей; мати на руках; перебувати в рівновазі; відновлювати рівновагу; досягати рівноваги; активи (облігації), що приносять процентний дохід; примножувати багатство; вичерпувати багатство; альтернативні видатки володіння грошима; компенсувати видатки.

VI. Translate into English.

1. Рівновага грошового ринку встановлюється шляхом зміни цін на облігації.

2. Зі зміною цін на облігації процентні ставки змінюються у зворотному напрямі.

3. Зменшення пропозиції створює тимчасовий брак грошей на грошовому ринку.

4. Збільшення пропозиції облігацій на грошовому ринку викликає зменшення ціни на облігації та збільшення процентної ставки.

5. Збільшення пропозиції грошей створює їх тимчасовий надлишок, у результаті чого збільшується попит на облігації і, відповідно, ціна на них стає вищою.

6. Процентна ставка падає, і на грошовому ринку встановлюється рівновага.

VII. Unusual expressions in capital markets. Match the expressions in the box with the correct definitions.

boutique	pearl	turkey
seed capital	elves	window
megabid	fat cat	amber light

1. Market analysts who believe they control the market._____

2. An investment bank which concentrates on mergers and acquisitions or other specialised transactions.

3. A very profitable investment or stock._____

4. A bad investment.____

5. Money provided by an existing company to start a new business._____

6. An investment which allows the investor to observe technology.______

7.___ Advanced warning that something is wrong in a company.

8. A venture capitalist who receives a high return on an investment.______

9. A very large takeover bid.____

VIII. Markets. Choose correct term to match the definitions below.

1.	a) black market	b) backroom market	c) brisk market
2.	a) money market	b) capital market	c) fund market
3.	a) discount market	b) captive market	c) domestic market
4.	a) dark market	b) flea market	c) down market
5.	a) dull market	b) bull market	c) doll market
6.	a) leading market	b) free market	c) forward market
	a) gloomy market	b) grey market	c) easy market
8.	a) new issues market	b) seller's market	c) active market
9.	a) bear market	b) over-the-counter market	c) outcry market
10.	a) unlisted securities market	b) risk market	c) spot market

1. Wholly illegal market, illicit and uncontrolled, dealing in scarce or stolen goods is called.

2. Market made up of various sources of capital (long-term) for investment in new and already existing companies is known as_________________.

PART II. FINANCE

3. ___ is that part of London money markets that involves the buying and selling of

short-term debt between the commercial banks, the discount houses and the Bank of England, which acts as a lender of the last resort.

4. Something that is poor quality and often low-priced is a______.

5. Market on which little activity is taking place is called a______.

6. ____ is a market in (contracts or options for) goods that are to be delivered at a future

date.

7. ____ is any semi-legal market that keeps within the letter but not the spirit of the law.

The term is most usually applied to the market dealing in any stock or share whose issue has been announced but which has not yet taken place. Traders therefore gamble on the eventual selling price of the issue when it comes onto the market.

8. An alternative term for 'primary market' is______.

9. Market on which securities not listed on any registered stock exchange may be bought and sold. It is operated by a limited number of market-makers, often on the basis of matched bargains.

10. ___ is a market for shares in companies that do not fulfil the entry requirements for a

full quotation the Stock Exchange, or that do not wish to be quoted, but which do fulfil certain less stringent (обов'язковий) requirements.

IX. Choose the correct answer.

1. A marketplace is...

a) The area surrounding a supermarket.

b) Any place where people do disorganised selling of goods.

c) An open space in a town where a market is held

2. A futures contract is...

a) An agreement to buy or sell goods, currency or securities for delivery at a future date and for a price fixed in advance.

b) An agreement to buy or sell goods in the future.

c) An agreement only to buy or sell securities at a future date.

3. The exchange rate is...

a) The amount of goods that one is allowed to sell (exchange for money) on alternate days at the market.

b) The amount of one currency that can be bought with another.

c) The amount of all existing currencies that can be bought with the US dollar.

4. A fraud is...

a) The crime of stealing money by breaking into a safe.

b) The crime of gaming money by dishonesty.

c) The crime of kidnapping.

5. A market maker is...

a) A person who controls the order on a marketplace.

b) A firm that as a member of the London Stock Exchange, buys and sells securities for a profit: it may act as a broker for clients or buy and sell for itself.

c) A commercial organisation that buy and sell only their own securities.

6. The City is...

a) The oldest part of London, the financial centre of the UK, where the International Stock Exchange, the major banks and insurance companies are.

b) The modern part of New York well-known for its shopping-mall.

c) The oldest part of London, famous for its gardens and parks.

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