ACCA Financial Management (F9) Certification Practice Exam

What characterizes money markets?

1. They only deal with long-term financial instruments

2. They include trading in short-term financial instruments

3. They focus exclusively on foreign currency lending

4. They are operated solely by the government

The correct answer is: They include trading in short-term financial instruments

Money markets are primarily characterized by the trading of short-term financial instruments, typically with maturities of one year or less. These markets facilitate the borrowing and lending of cash for shorter durations, making them essential for managing liquidity and funding needs of businesses, financial institutions, and governments. Instruments commonly traded in money markets include Treasury bills, commercial paper, certificates of deposit, and repurchase agreements. The focus on short-term instruments is crucial because it allows entities to meet immediate cash flow requirements, manage operational funds, and take advantage of investment opportunities without committing to long-term financing obligations. This characteristic distinguishes money markets from capital markets, which involve long-term financial instruments. Understanding this framework helps explain why the other options do not accurately capture the essence of money markets. For instance, restricting discussions to long-term financial instruments, foreign currency lending, or government-only operations does not reflect the broad and inclusive nature of activity within money markets, where various participants, including private and corporate entities, are actively involved.