What are features of financial instruments?
Examples of financial instruments include stocks, bonds, derivatives, commodities, currencies, options, futures contracts, and swaps. These instruments have various characteristics, such as maturity dates, interest rates, payment schedules, and underlying assets.
There are typically three types of financial instruments: cash instruments, derivative instruments, and foreign exchange instruments.
Cash instruments include things like deposits and loans, as well as easily transferable securities. This type of instrument is directly influenced by the market, so any market fluctuations will be directly reflected in the cash asset's value.
It has (1) one or more underlyings and (2) one or more notional amounts or payment provisions or both. Those terms determine the amount of the settlement or settlements, and, in some cases, whether or not a settlement is required.
The four fundamental characteristics that determine the value of a financial instrument are (1) The size of the payment that is promised; (2) When the promised payment is to be made; (3) the likelihood that the payment will be made; (4) The conditions under which the payment is to be made.
- Cash instruments.
- Derivative instruments.
- Foreign exchange (Forex) instruments.
Aside from cash, the more common types of financial assets that investors encounter are: Stocks are financial assets with no set ending or expiration date. An investor buying stocks becomes part-owner of a company and shares in its profits and losses. Stocks may be held indefinitely or sold to other investors.
- Liquidity. They can be easily converted into cash where need be.
- Safety. Have very low default risk making them the safest investment.
- Rapid maturity. They are targeted to meet short term capital needs for a business or the government thus mature within a short period.
Characteristics of Money Market Instruments
It is highly liquid as it has instruments that have a maturity below one year. Most of the money market instruments provide fixed returns.
It is a direct relationship between you and the bank, not an impersonal legal right that can be transferred. The instrument has a direct correlation with market information (Option, Future, CFD ...), whereas product is generally an account, Bonds, Shares and loan.
How do financial instruments work?
A financial instrument is a contract that obliges one party to transfer money or shares in a company to another party in the future in exchange for something of value. The parties can be corporations, partnerships, government agencies, or individuals.
Financial Instruments Valuation includes determining the Fair Value of equity instruments, debt instruments, derivatives (option and future contracts) and embedded derivatives (convertible bonds / preference shares). Financial Instruments may require valuation for commercial, financial reporting or regulatory purposes.
A financial instrument is an agreement between two parties with monetary value. In other words, any asset that holds capital and which can be traded is a financial instrument. It is noteworthy that financial instruments can be palpable or virtual documents representing a legal agreement of any monetary value.
Fundamental analysis involves assessing the intrinsic value of an asset by analysing both quantitative and qualitative factors. For example, an investor may examine a company's financial statements, management quality, competitive position, and industry trends to determine whether its stock is a good investment.
The following are examples of items that are not financial instruments: intangible assets, inventories, right-of-use assets, prepaid expenses, deferred revenue, warranty obligations (IAS 32. AG10-AG11), and gold (IFRS 9.
Equity instrument: Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Fair value: the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
Structured financial instruments comprise a range of products designed to repackage and redistribute risk. They are pre-packaged investments based on a single security, a basket of securities, options, commodities, debt issuance or foreign currencies, and to a lesser extent, derivatives.
A primary instrument is a financial investment whose price is based directly on its market value. Primary instruments include cash-traded products like stocks, bonds, currencies, and spot commodities.
1.1 The objective of this Standard is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity's future cash flows.
While the product names and descriptions can often change, examples of high-risk investments include: Cryptoassets (also known as cryptos) Mini-bonds (sometimes called high interest return bonds) Land banking.
Which is the most secure financial instrument?
Bonds are one of the safest investment options in the market. Bonds, especially government and municipal bonds, offer more security of earnings at a reasonable risk, as compared to equities. Investing in bonds can be beneficial for your financial plan, irrespective of your age or risk appetite.
Complex financial instruments include derivatives (such as options and warrants, forwards, and futures) and hybrid/compound instruments (such as convertible debt, debt with detachable warrants, and perpetual debt).
Money markets include markets for such instruments as bank accounts, including term certificates of deposit; interbank loans (loans between banks); money market mutual funds; commercial paper; Treasury bills; and securities lending and repurchase agreements (repos).
Money Market Instruments
These instruments offer no regular coupon, or interest, payments. Instead, they are sold at a discount to their face value, with the difference between their market price and face value representing the interest rate they offer investors.
They have the maturity period of less than one year. Treasury bills, repurchase agreement and commercial paper all are short term investments and have a maturity level of less than one year. Hence, shares and bonds having maturity of more than one year are not considered as money market instrument.
