16.1 Introduction

The majority of now classical fixed income instruments are offered and traded in the capital market, but indexed inflation notes and floating rate notes, among other structured products, are traded in the money market. The same is true of certificates of deposit, money market claims and Treasury Bills (by definition). As this example demonstrates, capital market and money market overlap at least in some of the transactions being performed.

Common wisdom has it that the capital market addresses itself to equities. Not only are equities pre-eminent capital market instruments, but they are also at the origin of the capital market. ^[1] At the same time, however, the capital market handles debt instruments, and since the last two decades of the twentieth century it has proved itself most cost-effective in raising capital in competition to bank loans.

As Figure 16.1 shows, up to a point, but only up to a point, capital market and money market overlap. In general, short-dated instruments are traded in the money market and longer dated ones are traded in the capital market. This, however, is not always the case, with many financial products falling into a grey area of exceptions.

Figure 16.1: The capital market, money market and forex market are both distinct and interconnected, depending on the instrument being traded

Currency exchange rate (forex) trades are not part of the markets discussed in the preceding paragraphs. For any practical purpose, the foreign exchange market is one on its own. Bob...