Financial instruments are monetary
contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form of
currency
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general ...
(forex); debt (
bonds,
loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...
s);
equity
Equity may refer to:
Finance, accounting and ownership
*Equity (finance), ownership of assets that have liabilities attached to them
** Stock, equity based on original contributions of cash or other value to a business
** Home equity, the diff ...
(
shares); or derivatives (
options
Option or Options may refer to:
Computing
*Option key, a key on Apple computer keyboards
*Option type, a polymorphic data type in programming languages
*Command-line option, an optional parameter to a command
*OPTIONS, an HTTP request method
...
,
futures,
forwards).
International Accounting Standards IAS 32 and
39 define a financial instrument as "any contract that gives rise to a
financial asset
A financial asset is a non-physical asset whose value is derived from a contractual claim, such as bank deposits, bonds, and participations in companies' share capital. Financial assets are usually more liquid than other tangible assets, such ...
of one entity and a financial
liability or equity instrument of another entity".
Financial instruments may be categorized by "
asset class
In finance, an asset class is a group of financial instruments that have similar financial characteristics and behave similarly in the marketplace. We can often break these instruments into those having to do with real assets and those having ...
" depending on whether they are equity-based (reflecting
ownership of the issuing entity) or debt-based (reflecting a loan the investor has made to the issuing entity). If the instrument is debt it can be further categorized into short-term (less than one year) or long-term. Foreign exchange instruments and transactions are neither debt- nor equity-based and belong in their own category.
Types
Financial instruments can be either cash instruments or derivative instruments:
* Cash instruments – instruments whose value is determined directly by the
markets
Market is a term used to describe concepts such as:
*Market (economics), system in which parties engage in transactions according to supply and demand
*Market economy
*Marketplace, a physical marketplace or public market
Geography
*Märket, an ...
. They can be
securities, which are readily transferable, and instruments such as
loans and
deposits, where both borrower and lender have to agree on a transfer.
*
Derivative instruments – instruments which derive their value from the value and characteristics of one or more underlining entities such as an
asset
In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...
,
index, or
interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...
. They can be
exchange-traded derivatives and
over-the-counter (OTC) derivatives.
Understanding Derivatives
Federal Reserve Bank of Chicago. Accessed August 2, 2015. Some of the more common derivatives include forwards, futures, options
Option or Options may refer to:
Computing
*Option key, a key on Apple computer keyboards
*Option type, a polymorphic data type in programming languages
*Command-line option, an optional parameter to a command
*OPTIONS, an HTTP request method
...
, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps.
Some instruments defy categorization into the above matrix, for example repurchase agreements.
Measuring gain or loss
The gain or loss on a financial instrument is as follows:
See also
* Off-balance-sheet
Off balance sheet (OBS), or incognito leverage, usually means an asset or debt or financing activity not on the company's balance sheet. Total return swaps are an example of an off-balance-sheet item.
Some companies may have significant amounts ...
issues
* IFRS 9 – Accounting standard titled "Financial Instruments"
*
References
External links
IFRS List – The online community about IFRS/IAS and Auditing
Understanding Derivatives: Markets and Infrastructure
Federal Reserve Bank of Chicago, Financial Markets Group
{{DEFAULTSORT:Financial Instrument
Financial markets
Asset
Derivatives (finance)