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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 (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 | Other cash | Exchange-traded derivatives | OTC derivatives | |
| Debt (long term) 1 year | Bonds | Loans | Bond futures Options on bond futures | Interest rate swaps Interest rate caps and floors Interest rate options Exotic derivatives |
| Debt (short term) ≤ 1 year | Bills, e.g. T-bills Commercial paper | Deposits Certificates of deposit | Short-term interest rate futures | Forward rate agreements |
| Equity | Stock | N/A | Stock options Equity futures | Stock options Exotic derivatives |
| Foreign exchange | 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 | Loans and receivables | Amortized costs | Net income when asset is derecognized or impaired (foreign exchange and impairment recognized in net income immediately) |
| Assets | Available for sale financial assets | Deposit account – fair value | Other comprehensive income (impairment recognized in net income immediately) |
See also
- Off-balance-sheet issues
- IFRS 9 – Accounting standard titled "Financial Instruments"
- IFRS 7 – Accounting standard titled "Financial Instruments: Disclosures"
References
- International Accounting Standard (IAS) 32.11
- Understanding Derivatives Archived 2013-08-12 at the Wayback Machine. Federal Reserve Bank of Chicago. Accessed August 2, 2015.
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
- Why the Stock Market is better than having your money in the bank…
This article needs additional citations for verification Please help improve this article by adding citations to reliable sources Unsourced material may be challenged and removed Find sources Financial instrument news newspapers books scholar JSTOR July 2024 Learn how and when to remove this message 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 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 TypesFinancial 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 typeSecurities Other cash Exchange traded derivatives OTC derivativesDebt long term 1 year Bonds Loans Bond futures Options on bond futures Interest rate swaps Interest rate caps and floors Interest rate options Exotic derivativesDebt short term 1 year Bills e g T bills Commercial paper Deposits Certificates of deposit Short term interest rate futures Forward rate agreementsEquity Stock N A Stock options Equity futures Stock options Exotic derivativesForeign exchange 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 lossThe gain or loss on a financial instrument is as follows Instrument Type Categories Measurement Gains and lossesAssets Loans and receivables Amortized costs Net income when asset is derecognized or impaired foreign exchange and impairment recognized in net income immediately Assets Available for sale financial assets Deposit account fair value Other comprehensive income impairment recognized in net income immediately See alsoOff balance sheet issues IFRS 9 Accounting standard titled Financial Instruments IFRS 7 Accounting standard titled Financial Instruments Disclosures ReferencesInternational Accounting Standard IAS 32 11 Understanding Derivatives Archived 2013 08 12 at the Wayback Machine Federal Reserve Bank of Chicago Accessed August 2 2015 External linksIFRS List The online community about IFRS IAS and Auditing Understanding Derivatives Markets and Infrastructure Federal Reserve Bank of Chicago Financial Markets Group Why the Stock Market is better than having your money in the bank
