Financial instruments

What is financial instrument?

Financial instruments are contracts involving monetary assets that can be bought, traded, created, modified, or settled. These instruments entail a contractual obligation between parties, ensuring that each party fulfills its part of the agreement. For instance, if a company pays cash for a bond, it is obligated to provide cash while the other party must deliver the bond.

Types of Financial Instruments

Cash Instruments

Securities: Traded on the stock market, securities have monetary value and represent ownership in a publicly-traded company.

Deposits and Loans: These are considered cash instruments as they involve monetary assets with contractual agreements between parties.

Derivative Instruments

Synthetic Agreement for Foreign Exchange (SAFE): An OTC agreement guaranteeing a specified exchange rate for a period.

Forward: A customizable derivative contract where the exchange occurs at the end of the contract at a specific price.

Future: A contract for the exchange of derivatives on a future date at a predetermined rate.

Options: Agreements granting the buyer the right to buy or sell derivatives at a predetermined price for a set period.

Interest Rate Swap: An agreement where parties swap interest rates on their loans in different currencies.

Foreign Exchange Instruments

Spot: An agreement for the actual exchange of currency within two working days.

Outright Forwards: A forward currency agreement with the exchange done before the required date, useful in fluctuating exchange rates.

Currency Swap: The simultaneous buying and selling of currencies with different specified value dates.