Kalpana Kalpana

Financial instrument

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Financial instrument

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 (share), or a contractual right to receive or deliver cash (bond).

Contents

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".

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 underlying entities such as an asset, index, or interest rate. They can be exchange-traded derivatives and over-the-counter (OTC) derivatives.
  • Alternatively, financial instruments may be categorized by "asset class" 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 categorised 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.

    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:

    References

    Financial instrument Wikipedia


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