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.
According to IAS 32 and 39, it is defined as ‘any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity’.
Categorization
F
inancial 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 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 entity such as an Asset an Index or an Interest Rate. They can be divided into exchange-traded derivatives and over-the-counter (OTC) derivatives.
Alternatively, financial instruments can be categorize
d 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 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.