Institutions of the financial sector play a crucial role in finance. This is because these institutions play a vital role in creating market efficiency. These include denomination divisibility — producing financial claims of different dollar amounts — The Function Of Financial Institutions articles currency transform — purchasing and selling financial claims in one currency or another currency, find useful reference.

Diversification credit risk, which allows lenders to spread out their risks better. Liquidity, whereby direct financial obligations are purchased with low liquidity and indirect financial agreements with high liquidity issued. The best trading conditions will be achieved if all services are in full operation. The money market is an interconnected set of markets where companies and banks can modify their liquidity situation by borrowing on short terms or lending for long periods.

Federal Reserve System runs money policies through money market and US Treasury takes advantage of the money market to finance federal government activities. Treasury Bills as well commercial papers and negotiable Cds make up the majority of money market securities. Where can business companies get financing for long term projects? Capital Markets. It is here that consumers get finance to buy assets with a long-term. Money market investments tend to be less risky, and have a longer term than capital market investments. Capital market securities most often used are residential mortgages, corporate stocks and Treasury bills.

In order to achieve maximum profit, financial institutions aim for profit maximization. They maximise profits by buying money for lower interest rates than their assets. A financial institution’s type and nature of assets can expose them to many different risks. The risks that financial institutions face include foreign currency and interest rate volatility. Trading is also something you should be familiar with.