Financial Instruments

IAS says,
"any contract that gives rise to a financial
assets of one entity and a financial liability or equity
instrument of another entity."
Common Examples of FI
Cash
Demand and time deposits
Commercial paper
Accounts, notes, and loans receivable and payable
Debt and equity securities including investments
in subsidiaries, associates, and joint ventures
Asset backed securities such as collateralized
mortgage obligations, repurchase agreements,
and securitized packages of receivables
Derivatives, including options, rights, warrants,
futures contracts, forward contracts, and swaps.
Derivatives
Value changes in response to the change in an underlying varia
Key types of Derivatives
1. Forward: A contract to purchase or sell a specific
quantity of a financial instrument, a commodity, or a
foreign currency at a specified price determined at the
outset with delivery or settlement at a specified future
date.
Ex. On 10th November A enters into an agreement to buy
100 kgs wheat on 1st may at tk10000 from B, a farmer. It
is a case of forward contract where a has to pay 10000
on 1st may and B has to supply the wheat.
2. Future: A contract to buy or sell an asset such as
instrument, commodity at a predetermined future date
and price.
Future contract details the quality and quantity of assets
Most popular assets where future contracts available
i) equity
ii) stock
iii) commodity
ix) currency
3. Swaps: Contracts between two parties
to exchange cash flaws or series of cash
flows in the future based on a notional
amount and fixed and floating rates.
The two commonly used swaps
i)Interest rate swaps: Entails only the
interest related cash flows
ii) Currency swaps: Foreign exchange
contract to exchange a given amount of one
currency for another
4. Options: A contract between 2 parties in which
one party has the right but not the obligation to buy or
sell a specified assets at a specified price (strike price),
during or at a specified period of time. These can be in
individually written or ex change-traded.
Common features:
i. State the underlying asset
ii. Exercise price or strike price
iii. Maturity or expiration date
ix. Exercise style, Whether American or European
Types of options:
Call options-An option that the holder has
the right not the obligation to buy the asset at
a predetermined price.
long- price will increase
Short- price will decrease
Put options-An options that the holder has
the right not the obligations to sell the asset at
a predetermined price.
Long- Investors expect price will increase
Short- Investors expect price will decrease