Financial instruments are monetary
contracts
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
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 (forex); debt (
bonds,
loans);
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 dif ...
(
shares
In financial markets, a share is a unit of equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers to all of the shares of an ...
); 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
Futures may mean:
Finance
*Futures contract, a tradable financial derivatives contract
*Futures exchange, a financial market where futures contracts are traded
* ''Futures'' (magazine), an American finance magazine
Music
* ''Futures'' (album), a ...
,
forwards).
International Accounting Standards 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 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,
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. 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), an American finance magazine
Music
* ''Futures'' (album), a ...
, 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 – 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)