Financial assets/Instruments

Financial instruments are monetary contracts between parties. They can be created, Traded, changed, and settled. They may be cash (currency), proof of ownership in a company, or a contractual right to receive or deliver money; debt (bonds, loans); equity (shares); or derivatives (options, futures, forwards).

According to International Accounting Standards IAS 32 and 39, a financial instrument is “any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity”.

Financial instruments are classified as “asset class” depending on whether they are equity-based (representing ownership of the issuing business) or debt-based (reflecting a loan made by the investor to the issuing organization). If the instrument is debt, it may be divided into two categories: short-term (less than one year) and long-term. Foreign exchange instruments and transactions are neither debt or equity-based and fall into their own category.

Types

Financial instruments might be cash or derivative instruments.

Cash instruments are those whose value is decided directly by the market. They may be securities, which are easily transferable, or instruments like loans and deposits, which need both the borrower and the lender to consent to a transfer.

Derivative instruments are those that derive their value from the value and characteristics of one or more underlying entities, such as an asset, index, or interest rate. Derivatives may be exchange-traded or over-the-counter. Forwards, futures, options, swaps, and their variants, such as synthetic collateralized debt obligations and credit default swaps, are some of the most prevalent derivatives.

Financial instruments may also be classed according to their asset type, which includes equity-based and debt-based financial instruments.

Stocks and shares are examples of equity-based financial tools. Exchange-traded derivatives, such as equity futures and stock options, fall into the same category.

Debt-based financial instruments, on the other hand, are made up of short-term securities such as commercial paper (CP) and treasury bills (T-bills) with a maturity of one year or less.

This category includes cash instruments such as certificates of deposit (CDs). Similarly, this category includes exchange-traded derivatives such as short-term interest rate futures.

Bonds and other long-term debt-based financial instruments come under this category since their maturities exceed a year. Bond futures and options are some instances of exchange-traded derivatives..