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).


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".[1]




Contents






  • 1 Types


  • 2 Measuring gain or loss


  • 3 See also


  • 4 References


  • 5 External links





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 underlineing entities such as an asset, index, or interest rate. They can be exchange-traded derivatives and over-the-counter (OTC) derivatives.[2]


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.









































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


References





  1. ^ International Accounting Standard (IAS) 32.11


  2. ^ Understanding Derivatives. 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




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