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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 or a contractual right to receive or deliver in the form of currency (forex); debt (bonds, loans); equity (shares); or derivatives (options, futures, forwards).
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]
Financial instruments may be categorized by "asset class" depending on whether they are foreign exchange-based (reflecting foreign exchange instruments and transactions), 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 categorized into short-term (less than one year) or long-term.
Financial instruments can be either cash instruments or derivative instruments:
| 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.
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) |