Financial Instrument

Business, Legal & Accounting Glossary

Definition: Financial Instrument




Full Definition of Financial Instrument


Financial instrument is defined as a virtual or written document stating a legal agreement that has a monetary value. Financial instruments are broadly categorized as a debt-based financial instrument and equity-based financial instrument.

An equity-based financial instrument represents ownership of the asset. A debt-based financial instrument, on the other hand, is an index of the loan taken by the owner of an asset from the investor. Apart from these two main categories, there are a couple of other divisions as well. These include foreign exchange instruments.

The financial instruments enable the easy flow of finances or capital among international investors.

Important Concepts Related To Financial instruments

The following are certain important concepts related to financial instruments:

  • Derivatives
  • Financial futures
  • Primary instrument
  • Forwards
  • Directional movement index
  • Equity derivative
  • Arbitrage
  • Commodities

Derivatives

Derivatives are financial instruments. Characteristics and financial worth of a derivative is dependent on the same qualities of an underlier. Underlier is mostly a commodity, equity, bond or currency. Futures and options are examples of a derivative.

Primary Instruments

The financial worth of a primary instrument is fixed directly by the particular market where it is being traded. Its value is not calculated in accordance with that of another financial instrument.

Financial Futures

Financial futures are futures contracts. They are based on certain types of financial instruments like treasury bonds, currencies, certificates of deposits and indexes.

Equity Derivative

The underlying value of an equity derivative is premised on a particular stock. Derivatives are used for hedging against risk. Options are used in such cases.

Bonds

Bonds are used in the financial market for financing projects.


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Definition Sources


Definitions for Financial Instrument are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 29th March, 2020 | 14 Views.