Definition of a Bank Instrument?
Bank instruments are assets that can be traded, or they can also be seen as packages of capital that may be traded. Most types of financial instruments provide efficient flow and transfer of capital all throughout the world’s investors. These assets can be cash, a contractual right to deliver or receive cash or another type of financial instrument, or evidence of one’s ownership of an entity.
- A bank instrument is a real and effective document representing a legal agreement involving any kind of monetary value.
- Bank instruments may be divided into two types: cash instruments and derivative instruments.
- Bank instruments may also be divided according to an asset class, which depends on whether they are debt-based or equity-based.
- Foreign exchange instruments comprise a third, unique type of financial instrument.
Knowledge About Financial Instruments
Bank instruments can be real and effective documents representing a legal agreement involving any kind of monetary value. Equity-based financial instruments represent ownership of an asset. Debt-based financial instruments represent a loan made by an investor to the owner of the asset.
Foreign exchange instruments comprise a third, unique type of financial instrument. Different subcategories of each instrument type exist, such as preferred share equity and common share equity.
International Accounting Standards (IAS) defines bank instruments as “any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
Types of Financial Instruments
Financial instruments may be divided into two types: cash instruments and derivative instruments.
- The values of cash instruments are directly influenced and determined by the markets. These can be securities that are easily transferable.
- Cash instruments may also be deposits and loans agreed upon by borrowers and lenders.
- The value and characteristics of derivative instruments are based on the vehicle’s underlying components, such as assets, interest rates, or indices.
- These can be over-the-counter (OTC) derivatives or exchange-traded derivatives.
There are no securities under foreign exchange. Cash equivalents come in spot foreign exchange. Exchange-traded derivatives under foreign exchange are currency futures. OTC derivatives come in foreign exchange options, outright forwards, and foreign exchange swaps.
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