Financial_instrument

1. 1 Financial instrument
A financial instrument is either cash; evidence of an ownership interest in an entity; or a
contractual right to receive, or deliver, cash or another financial instrument.
In today's financial marketplace, financial instruments can be classified generally as equity
based, representing ownership of the asset, or debt based, representing a loan made by an
investor to the owner of the asset. Foreign exchange instruments comprise a third, unique type
of instrument. Different subcategories of each instrument type exist, such as preferred share
equity and common share equity.
Financial instruments can be categorized by form depending on whether they are cash
instruments or derivative instruments:
 Cash instruments are financial instruments whose value is determined directly by
markets. They can be divided into securities, which are readily transferable, and other
cash instruments such as loans and deposits, where both borrower and lender have to
agree on a transfer.
 Derivative instruments are financial instruments which derive their value from the
value and characteristics of one or more underlying entity such as an Asset an Index or
an Interest Rate. They can be divided into exchange-traded derivatives and over-the-
counter (OTC) derivatives.
Alternatively, financial instruments can 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 it is debt, it can be further categorized 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.
Collected & Shorted By Sabbir Hossan | sabbir.best@gmail.com

2. 2 Financial instrument
Combining the above methods for categorization, the main instruments can be organized into a
table as follows:
Instrument Type
Asset Class
Exchange-traded
Securities Other cash OTC derivatives
derivatives
Interest rate swaps
Debt (Long Bond futures Interest rate caps and
Term) Bonds Loans Options on bond floors
>1 year futures Interest rate options
Exotic instruments
Debt (Short Bills, e.g. T-Bills Deposits
Short term interest rate Forward rate
Term) Commercial Certificates of
futures agreements
<=1 year paper deposit
Stock options Stock options
Equity Stock N/A
Equity futures Exotic instruments
Foreign exchange
options
Foreign Spot foreign Outright forwards
N/A Currency futures
Exchange exchange Foreign exchange
swaps
Currency swaps
Some instruments defy categorization into the above matrix, for example repurchase
agreements.
Collected & Shorted By Sabbir Hossan | sabbir.best@gmail.com

3. 3 Financial instrument
Measuring Financial Instrument's Gain or Loss
The table below shows how to measure a financial instrument's gain or loss:
Instrument
Type
Categories Measurement Gains and losses
Net income when asset is derecognized or
Loans and
Assets Amortized costs impaired (foreign exchange and impairment
receivables
recognized in net income immediately)
Available for sale Deposit account - Other comprehensive income (impairment
Assets
financial assets Fair value recognized in net income immediately)
Collected & Shorted By Sabbir Hossan | sabbir.best@gmail.com