Financial instrument

1. FINANCIAL
INSTRUMENTS

2. NATURE OF
FINANCIAL
INSTRUM ENT
IN THE DEFINITION CONTRACT
REFERS TO AN AGREEMENT
BETWEEN TWO OR MORE PARTIES
THAT HAS CLEAR ECONOMIC
CONSEQUENCES THAT THE
PARTIES HAVE LITTLE, IF ANY.
DISCRETION TO AVOID, USUALLY
BECAUSE THE AGREEMENT IS
ENFORCEABLEBY LAW

3. FINANCIAL
INSTRUMENTS
IS ANY CONTRACT THAT GIVES
RISETO A FINANCIAL ASSETOF
ONE ENTITY AND A FINANCIAL
LIABILITY OR EQUITY
INSTRUMENT OF ANOTHER
ENTITY.

4. FINANCIAL INSTRUMENTS INCLUDE PRIMARY INSTRUMENTS
AND DERIVATIVE FINANCIAL INSTRUMENTS.
BASED ON THE DEFINITION, FINANCIAL INSTRUMENTS INCLUDE
FINANCIAL ASSETS, FINANCIAL LIABILITIES, EQUITY INSTRUMENT
AND DERIVATIVES.
DERIVATIVES INCLUDE FINANCIAL OPTIONS, FUTURES AND
FORWARDS, INTEREST RATE SWAPS AND CURRENCY SWAPS.
NATURE OF FINANCIAL INSTRUMENT

5. CASH
Includes paper bills and coins.
EQUITY INSTRUMENT OF ANOTHER ENTITY
Examples are investment in ordinary share
of a corporation.
1
2
3 RECEIVABLE
Examples are accounts, notes and loans
receivables.
Financial Asset

6. SOME OF MOST COMMONLY
ENCOUNTERED FINANCIAL
INSTRUMENTS REPRESENTING
FINANCIAL ASSET
1 . CASH ON HAND AND IN BANKS
Petty Cash - Refers to cash balances kept on hand at various
locations to pay for minor expenditures such as postage and other
small out-of pocket expenditures.
Demand, savings and time deposits - represent amounts on deposit in
checking, savings and time deposit accounts respectively. Time
deposits are placements covering a relatively long period of time.
Undeposited checks. Are checks payable to the enterprise or bearer
but not yet presented to the bank for payment.

7. SOME OF MOST COMMONLY
ENCOUNTERED FINANCIAL
INSTRUMENTS REPRESENTING
FINANCIAL ASSET
Foreign currencies - is the currency used by a foreign country as its
recognized form of monetary exchange.
Money orders - are financial instruments similar to bank drafts but
are drawn generally from authorized post offices or other financial
institutions.
Bank drafts - are commitments by banking institutions to advance
funds on demand by the party to whom the draft was directed.

8. SOME OF MOST COMMONLY
ENCOUNTERED FINANCIAL
INSTRUMENTS REPRESENTING
FINANCIAL ASSET
2. ACCOUNTS, NOTES AND LOANS RECEIVABLE
AND INVESTMENT IN BONDS AND OTHER DEBT
INSTRUMENT ISSUED BY OTHER ENTITIES:
• Trade receivables
• Promissory notes
• Bond receivables
3.DERIVATIVES FINANCIAL INSTRUMENTS
• Futures Contracts
• Forward Contracts
• Call Options
• Foreign Currency Futures
• Interest Rate Swaps

9. B. A CONTRACT THAT WILL OR MAY BE
SETTLEDIN THE ENTITY'S OWN
EQUITY INSTRUMENTS AND IS:
(i)A non-derivative for which the entity is
or may be obligated to deliver a variable
number of the entity's own equity
instruments; or
(ii)A derivative that will or may be settled
other than by the exchange of a fixed
amount of cash or another financial asset
for a fixed number of the entity's own
equity instruments.
A. A CONTRACTUAL OBLIGATION
(i)To deliver cash or another financial
asset to another entity; or
(ii)To exchange financial assets or
financial liabilities with another entity
under conditions that are potentially
unfavorable to the entity;
FINANCIAL LIABILITIES
A FINANCIAL LIABILITY IS ANY LIABILITY THAT IS :

10. EXAMPLES OF FINANCIAL LIABILITIES
1. . ACCOUNTS AND NOTES PAYABLE, LOANS FROM
OTHER ENTITIES AND BONDS AND OTHER DEBT
INSTRUMENTS ISSUED BY THE
ENTITY.
2. . DERIVATIVE FINANCIAL LIABILITIES.
3. . OBLIGATIONS TO DELIVER OWN SHARES WORTH
A FIXED AMOUNT OF CASH.
4. . SOME DERIVATIVES ON OWN EQUITY
INSTRUMENTS.

11. EQUITY INSTRUMENTS
An equity instruments is any contract that evidence a residual interest
in the assets of the entity after deducting all of its liabilities.
EXAMPLES OF EQUITY INSTRUMENTS ARE:
1. ORDINARY SHARES
2. PREFERENCE SHARES
3. . WARRANTS OR WRITTEN CALL OPTION THAT ALLOW
THE HOLDER
TO SUBSCRIBE OR PURCHASE ORDINARY SHARES IN
EXCHANGE FOR A FIXED AMOUNT OF EACH OR
ANOTHER FINANCIAL ASSET.

12. DERIVATIVE FINANCIAL
INSTRUMENTS
DERIVATIVES ARE FINANCIAL INSTRUMENTS THAT "DERIVE"
THEIR VALUE ON CONTRACTUALLY REQUIRED CASH FLOWS
FROM SOME OTHER SECURITY OR INDEX.
EXAMPLESOF DERIVATIVES :
1. FUTURES CONTRACTS - IS AN AGREEMENT BETWEEN A SELLER AND
BUYER THAT REQUIRES THAT SELLER TO DELIVER A PARTICULAR
COMMODITY (SAY CORN, GOLD, OR SOYA BEANS) AT A DESIGNATED FUTURE
DATE, AT A PREDETERMINED PRICE.

13. DERIVATIVE FINANCIAL
INSTRUMENTS
2.. FORWARD CONTRACTS - IS SIMILAR TO A FUTURES CONTRACT BUT DIFFERS
IN THREE WAYS:
A. A FORWARD CONTRACT CALLS FOR DELIVERY ON A SPECIFIC DATE, WHEREAS A
FUTURES CONTRACT PERMITS THE SELLER TO DECIDE LATER WHICH SPECIFIC
DAY WITHIN THE SPECIFIED MONTH WILL BE THE DELIVERY DATE (IF IT GETS AS
FAR AS ACTUAL DELIVERY BEFORE IT IS CLOSED OUT).
B. UNLIKE A FUTURESCONTRACT, A FORWARD USUALLY IS NOT TRADED ON A
MARKET
EXCHANGE.
C. UNLIKE A FUTURES CONTRACT, A FORWARD CONTRACT DOES NOT CALL FOR A
DAILY CASH SETTLEMENT FOR PRICE CHANGES IN THE UNDERLYING CONTRACT.
GAINS AND LOSSES ON FORWARD CONTRACTS ARE PAID ONLY.

14. DERIVATIVE FINANCIAL
INSTRUMENTS
3. CALL OPTIONS - 0PTIONS GIVE ITS HOLDER THE RIGHT EITHER TO
BUY OR SELL AN INSTRUMENT.
4. FOREIGN CURRENCY FUTURES - ARE DENOMINATED IN THE
CURRENCY OF THE LENDER (JAPANESE YEN, SWISS FRANC, GERMAN
MARK, AND SO ON).
5. INTEREST RATE SWAPS – THESE ARE CONTRACTS TO EXCHANGE CASH
FLOWS AS OF A SPECIFIED DATE OR A SERIES OF SPECIFIED DATES
BASED ON A NOTIONAL AMOUNT AND FIXED AND FLOATING RATES.