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".
Financial instruments may 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 the instrument 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.
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)
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.
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)|