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A financial instrument is a tradable asset of any kind; either cash, evidence of an ownership interest in an entity, or a contractual right to receive or deliver cash or another financial instrument.
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 the 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 entities such as an asset, index, or 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 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.
Combining the above methods for categorization, the main instruments can be organized into a table as follows:
|Asset class||Instrument type|
|Securities||Other cash||Exchange-traded derivatives||OTC derivatives|
|Debt (long term)
> 1 year
Options on bond futures
|Interest rate swaps
Interest rate caps and floors
Interest rate options
|Debt (short term)
≤ 1 year
|Bills, e.g. T-bills
Certificates of deposit
|Short-term interest rate futures||Forward rate agreements|
|Foreign exchange||N/A||Spot foreign exchange||Currency futures||Foreign exchange options
Foreign exchange swaps
Some instruments defy categorization into the above matrix, for example repurchase agreements.
Measuring financial instruments' gain or loss
The table below shows how to measure a financial instrument's gain or loss:
|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)|
- Off-balance-sheet issues
- International Accounting Standard (IAS) 32.11
- IFRS List – The online community about IFRS/IAS and Auditing
- Understanding Derivatives: Markets and Infrastructure Federal Reserve Bank of Chicago, Financial Markets Group