Money, capital & foreign exchange markets

This brief study note distinguishes between money, capital and currency markets

Money markets

• Market for short term loan finance for businesses and households
• Money is borrowed and lent normally for up to 12 months
• Includes inter-bank lending i.e. the commercial banks providing liquidity for each other
• Includes short term government borrowing e.g. 3-12 month Treasury Bills – to help fund the government’s budget (fiscal) deficit

Capital markets

• Market for medium-longer term loan finance
• Capital markets are the markets where securities such as shares and bonds are issued to raise medium to long-term financing
• Includes raising of finance by the government through the issue/sale of medium term - long term government bonds for example 10 year and 20 year bonds (loans)

Currency markets

• A market where currencies (foreign exchange) are traded. There is no single currency market – it is made up of the thousands of trading floors
• Gains or losses are made from the movement of exchange rates – speculative activity in the currency market is often high
• The spot exchange rate is the price of a currency to be delivered now, rather than in the future.
• The forward exchange rate is a fixed price given for buying a currency today to be delivered in the future