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 d ...
(forex); debt (
bonds,
loans);
equity (
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
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 fina ...
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
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
Ownership is the state or fact of legal possession and control over property, which may be any asset, tangible or intangible. Ownership can involve multiple rights, collectively referred to as title, which may be separated and held by different ...
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. 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 can ...
,
index
Index (or its plural form indices) may refer to:
Arts, entertainment, and media Fictional entities
* Index (''A Certain Magical Index''), a character in the light novel series ''A Certain Magical Index''
* The Index, an item on a Halo megastru ...
, 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, th ...
. 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 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 measuremen ...
– 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)