Overnight market
Encyclopedia
The overnight market is the component of the money market
involving the shortest term loan
. Lenders agree to lend borrowers funds only "overnight" i.e. the borrower must repay the borrowed funds plus interest
at the start of business the next day. Given the short period of the loan, the interest rate charged in the overnight market, known as the overnight rate
is, generally speaking, the lowest rate at which bank
s lend money.
Most of the activity in the so-called overnight market in fact occurs in the morning immediately after the start of business for the day. The typical day at a cash management group for a deposit
-taking financial institution
begins with forecasting the institution's clients' liquidity needs over the course of that day. If this projection is that the institutions' clients will need more money over the course of the day than the institution has on hand, the institution will borrow money on the overnight market that day. On the other hand, if the analyst projects that the institution will have surplus money on hand beyond that needed by its clients that day, then it will lend money on the overnight market that day.
The bulk of trading occurs in the morning and is based on these projections. If, however, over the course of the day, the actual amount of money required by the institution's clients departs from that projected in the morning, it may become necessary for the institution to borrow money on the overnight market to meet this unexpected demand from its clients; conversely, if the institution finds itself with more funds on hand than it anticipated late in the day, it will then lend those funds on the overnight market.
The overnight rate fluctuates over the course of a business day, depending on the amount of money demanded from and supplied to the overnight market over the course of the day. The rate quoted as the "overnight rate" may be the rate at the end of the day, or an average of the rate over the course of the day.
Bank
s are the largest participant in the overnight market, although some other large financial institutions, e.g. mutual funds, also buy and sell on the overnight market as a way to manage unanticipated cash needs or as a temporary haven for money until the institution can decide on where to invest that money.
Money market
The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...
involving the shortest term loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
. Lenders agree to lend borrowers funds only "overnight" i.e. the borrower must repay the borrowed funds plus interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
at the start of business the next day. Given the short period of the loan, the interest rate charged in the overnight market, known as the overnight rate
Overnight rate
The overnight rate is generally the rate that large banks use to borrow and lend from one another on the overnight market. In some countries , the overnight rate may be the rate targeted by the central bank to influence monetary policy...
is, generally speaking, the lowest rate at which bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s lend money.
Most of the activity in the so-called overnight market in fact occurs in the morning immediately after the start of business for the day. The typical day at a cash management group for a deposit
Deposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
-taking financial institution
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
begins with forecasting the institution's clients' liquidity needs over the course of that day. If this projection is that the institutions' clients will need more money over the course of the day than the institution has on hand, the institution will borrow money on the overnight market that day. On the other hand, if the analyst projects that the institution will have surplus money on hand beyond that needed by its clients that day, then it will lend money on the overnight market that day.
The bulk of trading occurs in the morning and is based on these projections. If, however, over the course of the day, the actual amount of money required by the institution's clients departs from that projected in the morning, it may become necessary for the institution to borrow money on the overnight market to meet this unexpected demand from its clients; conversely, if the institution finds itself with more funds on hand than it anticipated late in the day, it will then lend those funds on the overnight market.
The overnight rate fluctuates over the course of a business day, depending on the amount of money demanded from and supplied to the overnight market over the course of the day. The rate quoted as the "overnight rate" may be the rate at the end of the day, or an average of the rate over the course of the day.
Bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s are the largest participant in the overnight market, although some other large financial institutions, e.g. mutual funds, also buy and sell on the overnight market as a way to manage unanticipated cash needs or as a temporary haven for money until the institution can decide on where to invest that money.