1. Debt-Based Financial Instrumentsĭebt-based financial instruments are categorized as mechanisms that an entity can use to increase the amount of capital in a business. Examples include bonds, debentures, mortgages, U.S. Asset Classes of Financial Instrumentsīeyond the types of financial instruments listed above, financial instruments can also be categorized into two asset classes. The two asset classes of financial instruments are debt-based financial instruments and equity-based financial instruments. It is beneficial in cases of fluctuating exchange rates that change often.Ĭurrency Swap: A currency swap refers to the act of simultaneously buying and selling currencies with different specified value dates. Outright Forwards: A currency agreement in which the actual exchange of currency is done “forwardly” and before the actual date of the agreed requirement. It is termed “spot” because the currency exchange is done “on the spot” (limited timeframe). Spot: A currency agreement in which the actual exchange of currency is no later than the second working day after the original date of the agreement. In terms of currency agreements, they can be broken into three categories.

Foreign Exchange Instrumentsįoreign exchange instruments are financial instruments that are represented on the foreign market and primarily consist of currency agreements and derivatives. Interest Rate Swap: An interest rate swap is a derivative agreement between two parties that involves the swapping of interest rates where each party agrees to pay other interest rates on their loans in different currencies. Options: An option is an agreement between two parties in which the seller grants the buyer the right to purchase or sell a certain number of derivatives at a predetermined price for a specific period of time. Synthetic Agreement for Foreign Exchange (SAFE): A SAFE occurs in the over-the-counter (OTC) market and is an agreement that guarantees a specified exchange rate during an agreed period of time.įorward: A forward is a contract between two parties that involves customizable derivatives in which the exchange occurs at the end of the contract at a specific price.įuture: A future is a derivative transaction that provides the exchange of derivatives on a determined future date at a predetermined exchange rate.

The five most common examples of derivatives instruments are synthetic agreements, forwards, futures, options, and swaps. Derivative Instrumentsĭerivative instruments are financial instruments that have values determined from underlying assets, such as resources, currency, bonds, stocks, and stock indexes. When purchased or traded, a security represents ownership of a part of a publicly-traded company on the stock exchange.ĭeposits and Loans: Both deposits and loans are considered cash instruments because they represent monetary assets that have some sort of contractual agreement between parties. Securities: A security is a financial instrument that has monetary value and is traded on the stock market. Within cash instruments, there are two types securities and deposits, and loans. Types of Financial InstrumentsĬash instruments are financial instruments with values directly influenced by the condition of the markets.

There are typically three types of financial instruments: cash instruments, derivative instruments, and foreign exchange instruments. One company is obligated to provide cash, while the other is obligated to provide the bond.īasic examples of financial instruments are cheques, bonds, securities. In terms of contracts, there is a contractual obligation between involved parties during a financial instrument transaction.įor example, if a company were to pay cash for a bond, another party is obligated to deliver a financial instrument for the transaction to be fully completed. Updated OctoWhat is a Financial Instrument?įinancial instruments are contracts for monetary assets that can be purchased, traded, created, modified, or settled for.

Financial instruments of destruction