financial instrument
   HOME

TheInfoList



OR:

Financial instruments are monetary
contracts A contract is a legally enforceable agreement between two or more Party (law), parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, Service (economics), ser ...

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, Wikt:currens, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or currency in circulation, circulation as a medium of exchange, for example ba ...

currency
(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 de ...
s); equity (
shares In finance, financial markets, a share is a unit of Equity (finance), 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 t ...
); or derivatives ( options, futures, forwards).
International Accounting Standards International Financial Reporting Standards, commonly called IFRS, are accounting standard Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any spec ...
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 deposit (finance), bank deposits, bond (finance), bonds, and participations in companies' share capital. Financial assets are usually more market liq ...
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 Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of th ...

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. They can be
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
, which are readily transferable, and instruments such as
loans 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 de ...
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 othe ...
, 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 ...

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 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, swaps, and variations of these such as synthetic
collateralized debt obligation A collateralized debt obligation (CDO) is a type of structured finance, structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing Mortgage-backed se ...
s and
credit default swap A credit default swap (CDS) is a Swap (finance), financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt Default (finance), default (by the debtor) or other credit event. That is, the seller of the ...
s. 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 of ...
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)