From Surf Wiki (app.surf) — the open knowledge base

Financial instrument

Monetary contract between parties

Summary

Monetary contract between parties

A financial instrument is a monetary contract 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 (shares); or derivatives (options, futures, 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 foreign exchange-based (reflecting foreign exchange instruments and transactions), 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 categorized into short-term (less than one year) or long-term.

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. Some of the more common derivatives include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps.

Asset class	Instrument type		Securities
1 year		Debt (short term)
≤ 1 year		Equity		Foreign exchange
Bonds	Loans	Bond futures
Options on bond futures	Interest rate swaps
Interest rate caps and floors
Interest rate options
Exotic derivatives
Bills, e.g. T-bills
Commercial paper	Deposits
Certificates of deposit	Short-term interest rate futures	Forward rate agreements
Stock	N/A	Stock options
Equity futures	Stock options
Exotic derivatives
N/A	Spot foreign exchange	Currency futures	Foreign exchange options
Outright forwards
Foreign exchange swaps
Currency 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:

	Instrument Type		Categories		Measurement		Gains and losses		Assets		Assets
Loans and receivables	Amortized costs	Net income when asset is derecognized or impaired (foreign exchange and impairment recognized in net income immediately)
Available for sale financial assets	Deposit account – fair value	Other comprehensive income (impairment recognized in net income immediately)

References

International Accounting Standard (IAS) 32.11
[http://chicagofed.org/webpages/publications/understanding_derivatives/index.cfm Understanding Derivatives] {{Webarchive. link. (2013-08-12 . Federal Reserve Bank of Chicago. Accessed August 2, 2015.)

Wikipedia Source

This article was imported from Wikipedia and is available under the Creative Commons Attribution-ShareAlike 4.0 License. Content has been adapted to SurfDoc format. Original contributors can be found on the article history page.

financial-markets asset derivatives-(finance)

Want to explore this topic further?

Ask Mako anything about Financial instrument — get instant answers, deeper analysis, and related topics.

Research with Mako

Free with your Surf account

Content sourced from Wikipedia, available under CC BY-SA 4.0.

This content may have been generated or modified by AI. CloudSurf Software LLC is not responsible for the accuracy, completeness, or reliability of AI-generated content. Always verify important information from primary sources.

Report