Financial Instrument
Candlefocus EditorBy definition, financial instruments form the backbone of the financial services industry. They are used to raise capital, support investments, facilitate payments, and enable market participants to transfer risk. Financial instruments are also used to facilitate financial markets worldwide.
Cash instruments refer to cash or documents that represent the right to future cash payments. Cash instruments may include bank deposits, promissory notes, bills of exchange, certificates of deposits, money orders, and cheques. They are used to make payments or transfers of money between parties and can be used to raise funds by entering into initial contracts with investors.
Derivative instruments refer to contracts whose value is determined by the value of an underlying asset. Derivatives are contracts between two parties that involve the transfer of risk from one party to another. Common derivatives include futures, options, swaps, and forwards. They are used to minimize risks and to speculate on the direction of future price movements.
Equity-based financial instruments are securities that represent an ownership stake in a company. Common equity-based securities include stocks and mutual funds. They are traded on one or more exchanges and have a high degree of price volatility.
Debt-based financial instruments typically involve a debt, or obligation to repay, usually secured against something of value, such as a company or an individual. Common debt-based securities include bonds and treasury bills. They are characterized by a fixed coupon rate and a fixed term.
Foreign exchange financial instruments are used to speculate or hedge against exchange rate movements. They include both spot and forward contracts, and options and other derivative instruments. Foreign exchange instruments tend to be highly liquid and volatile, with significant price movements occurring on a daily basis.
Financial instruments are an essential part of the global economy and are used to create jobs, generate wealth, and stimulate growth. They are also used to facilitate payments and transfers of value, and to hedge against risks. Financial instruments have evolved over time and remain an integral part of the world's financial markets and the global economy.