Money, capital & foreign exchange markets

 STUDY NOTES

Money, capital & foreign exchange markets

Level:
A-Level
 
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 21 Mar 2021

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

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