Call money is short term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. Commercial banks have to uphold a minimum cash balance known as cash reserve ratio. Brokerages use call money as a short-term source of funding to cover margin accounts or obtain of securities. The funds can be obtained hastily.
Call money is a method for brokerage firms to finance boundary accounts or trade for their own accounts. Because call loans are unsecured and callable, they are in some ways riskier than other loans, but they also provide short-term liquidity that lubricates markets.
Call money is a way by which banks borrow from each other to be able to maintain the cash reserve ratio. The interest rate paid on call money loans is known as the call rate. It is a highly volatile rate that varies from day-to-day and sometimes even from hour-to-hour. There is an inverse relationship between call rates and other short-term money market instruments such as certificates of deposit and commercial paper. A rise in call money rates makes other sources of finance such as commercial paper and certificates of deposit cheaper in comparison for banks raise funds from these sources.
