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Financial instruments are monetary
contracts A contract is a legally binding document between at least two parties that defines and governs the rights and duties of the parties to an agreement. A contract is legally enforceable because it meets the requirements and approval of the law. A ...

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" in the most specific sense is money Money is any item or verifiable record that is generally accepted as payment for goods and services ...

currency
(forex); debt ( bonds,
loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avai ...
s); equity (
shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known ...
); or derivatives ( options,
futures Futures may mean: Finance *Futures contract, a tradable financial derivatives contract. *Futures exchange, a financial market where futures contracts are traded. *Futures (magazine), ''Futures'' (magazine), an American finance magazine. Music *Fu ...
, forwards).
International Accounting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company’s f ...
IAS 32 and 39 define a financial instrument as "any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity". Financial instruments may be categorized by "asset class" depending on whether they are equity-based (reflecting
ownership Ownership is the state or fact of exclusive right In Anglo-Saxon law Anglo-Saxon law (Old English Old English (, ), or Anglo-Saxon, is the earliest recorded form of the English language English is a West Germanic languages, West Germ ...
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 may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Sweden Art, entertainment, and media Films *Market (1965 film), ''Market'' (1965 ...
. They can be
securities A security is a tradable financial asset A financial asset is a non-physical asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication o ...
, which are readily transferable, and instruments such as
loans In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avai ...
and
deposits A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, Transaction account#Current accounts, current accounts or any of several other ...
, 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 Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
, index, or
interest rate An interest rate is the amount of interest In and , interest is payment from a or deposit-taking financial institution to a or depositor of an amount above repayment of the (that is, the amount borrowed), at a particular rate. It is disti ...
. 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 Futures may mean: Finance *Futures contract, a tradable financial derivatives contract. *Futures exchange, a financial market where futures contracts are traded. *Futures (magazine), ''Futures'' (magazine), an American finance magazine. Music *Fu ...
, options, swaps, and variations of these such as synthetic
collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured asset-backed security An asset-backed security (ABS) is a Security (finance), security whose income payments and hence value are derived from and collateralized (or "backed") by a spe ...
s and
credit default swap A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default Default may refer to: Law * Default (law), the failure to do something required by law ** Defaul ...
s. Some instruments defy categorization into the above matrix, for example
repurchase agreement A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in Government debt, government securities. The dealer sells the underlying security to investors and, by agreement bet ...
s.


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 In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that ...
issues *
IFRS 9 IFRS 9 is an International Financial Reporting Standard (IFRS) published by the International Accounting Standards Board (IASB). It addresses the accounting for financial instruments. It contains three main topics: classification and measurement ...
– 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)