Financial Instrument

A Financial Instrument is a financial contract that is a tradable asset (establishes financial rights and obligations).

• AKA: Marketable Security, Tradable Security, Financial Contract, Investment Vehicle, Security Instrument.
• Context:
  • It can typically represent Legal Agreement through financial instrument contract terms.
  • It can typically provide Monetary Value through financial instrument market pricing.
  • It can typically facilitate Capital Flow through financial instrument trading mechanisms.
  • It can typically enable Investment Activity through financial instrument capital deployment.
  • It can typically serve Risk Management Function through financial instrument hedging capability.
  • It can typically satisfy Regulatory Requirements through financial instrument compliance standards.
  • It can typically possess Market Valuation through financial instrument pricing mechanisms.
  • It can typically exhibit Liquidity Characteristics through financial instrument trading volume.
  • It can typically contain Ownership Rights or Contractual Obligations through financial instrument legal structure.
  • It can typically create Financial Asset for one entity and Financial Liability for another entity simultaneously.
  • It can typically establish Payment Obligations through financial instrument scheduled timeline.
  • It can typically incorporate Financial Covenants through financial instrument protective provisions.
  • It can typically allow Secondary Market Transactions through financial instrument transferability feature.
  • It can typically require Financial Disclosure through financial instrument reporting obligations.
  • It can typically include Termination Provisions through financial instrument exit conditions.
  • ...
  • It can often experience Price Volatility due to financial instrument market conditions.
  • It can often require Disclosure Filings through financial instrument regulatory reporting.
  • It can often involve Counterparty Relationships through financial instrument transaction agreements.
  • It can often provide Tax Consequences through financial instrument income treatment.
  • It can often support Portfolio Construction through financial instrument diversification benefits.
  • It can often facilitate Corporate Financing through financial instrument capital raising.
  • It can often undergo Credit Rating Assessment through financial instrument risk evaluation.
  • It can often specify Event of Default through financial instrument contractual breach conditions.
  • It can often define Priority of Payment through financial instrument creditor hierarchy.
  • It can often establish Collateral Arrangements through financial instrument security interest.
  • It can often include Dispute Resolution Mechanisms through financial instrument arbitration clauses.
  • It can often specify Settlement Procedures through financial instrument clearing processes.
  • It can often incorporate Market Reference Rates through financial instrument benchmark calculation.
  • It can often require Periodic Valuation through financial instrument mark-to-market procedure.
  • ...
  • It can range from being a Simple Financial Instrument to being a Complex Financial Instrument, depending on its financial instrument structure complexity.
  • It can range from being a Short-term Financial Instrument to being a Long-term Financial Instrument, depending on its financial instrument maturity duration.
  • It can range from being a Low-risk Financial Instrument to being a High-risk Financial Instrument, depending on its financial instrument risk profile.
  • It can range from being a Domestic Financial Instrument to being an International Financial Instrument, depending on its financial instrument issuance jurisdiction.
  • It can range from being a Slightly-Liquid Financial Instrument to being a Highly-Liquid Financial Instrument, depending on its financial instrument trading frequency.
  • It can range from being a Regulated Financial Instrument to being an Alternative Financial Instrument, depending on its financial instrument regulatory oversight.
  • It can range from being a Standardized Financial Instrument to being a Customized Financial Instrument, depending on its financial instrument contract specification.
  • It can range from being a Physical Financial Instrument to being a Digital Financial Instrument, depending on its financial instrument issuance format.
  • It can range from being a Plain Vanilla Financial Instrument to being an Exotic Financial Instrument, depending on its financial instrument feature complexity.
  • ...
  • It can facilitate Investment Strategy Implementation for financial instrument portfolio allocation.
  • It can enable Wealth Creation through financial instrument capital appreciation.
  • It can support Risk Transfer through financial instrument hedging function.
  • It can provide Income Generation through financial instrument periodic payments.
  • It can assist Market Price Discovery through financial instrument trading activity.
  • It can promote Economic Development through financial instrument capital formation.
  • It can enhance Market Liquidity through financial instrument standardized tradability.
  • It can support Monetary Policy Transmission through financial instrument interest rate sensitivity.
  • It can facilitate Global Capital Movement through financial instrument cross-border settlement.
  • It can enable Financial System Innovation through financial instrument product development.
  • It can provide Retirement Security through financial instrument long-term investment.
  • It can support Infrastructure Development through financial instrument project financing.
  • ...
• Examples:
  • Financial Instrument Classes, such as:
    • Equity Instruments, such as:
      • Common Stock representing direct corporate ownership.
      • Preferred Stock providing priority dividend rights.
      • American Depositary Receipt facilitating foreign stock ownership.
      • Real Estate Investment Trust Share offering property portfolio exposure.
      • Exchange-Traded Fund Share enabling diversified market access.
    • Debt Instruments, such as:
      • Corporate Bond for corporate debt financing.
      • Government Bond supporting sovereign debt management.
      • Municipal Bond enabling local government financing.
      • Commercial Paper providing short-term corporate funding.
      • Certificate of Deposit offering fixed-term bank deposit.
      • Mortgage-Backed Security facilitating residential loan securitization.
      • Asset-Backed Security monetizing consumer debt portfolio.
    • Derivative Instruments, such as:
      • Stock Option allowing equity purchase rights.
      • Interest Rate Swap facilitating interest exposure management.
      • Foreign Exchange Forward for currency risk hedging.
      • Commodity Future supporting price risk management.
      • Credit Default Swap providing default protection.
      • Total Return Swap enabling asset performance replication.
      • Weather Derivative mitigating climate-related business risk.
    • Hybrid Instruments, such as:
      • Convertible Bond combining debt characteristics with equity conversion options.
      • Preferred Equity offering debt-like dividends with equity-like appreciation.
      • Structured Note merging fixed income base with derivative components.
      • Contingent Convertible Bond providing regulatory capital compliance with loss absorption trigger.
      • Participating Preferred Stock delivering fixed dividends with additional profit sharing.
  • Financial Instrument Market Types, such as:
    • Exchange-Traded Financial Instruments, such as:
      • Listed Stock for public equity trading.
      • Exchange-Traded Fund providing diversified market exposure.
      • Exchange-Traded Option supporting standardized risk management.
      • Listed Bond enabling transparent debt trading.
      • Exchange-Traded Future facilitating standardized commodity exposure.
    • Over-the-Counter Financial Instruments, such as:
      • Forward Contract for customized future delivery.
      • Interest Rate Swap enabling bespoke rate exposure management.
      • Credit Default Swap providing tailored default protection.
      • Foreign Exchange Option offering flexible currency hedge.
      • Total Return Swap allowing customized asset exposure.
  • Financial Instrument Time Horizons, such as:
    • Money Market Instruments, such as:
      • Treasury Bill for short-term government borrowing.
      • Commercial Paper supporting corporate short-term financing.
      • Certificate of Deposit providing bank fixed-term deposit.
      • Repurchase Agreement enabling short-term secured funding.
      • Banker's Acceptance facilitating trade finance settlement.
    • Capital Market Instruments, such as:
      • Corporate Bond for long-term debt financing.
      • Common Stock enabling permanent equity capital.
      • Mortgage-Backed Security facilitating long-term housing finance.
      • Infrastructure Bond supporting multi-decade project funding.
      • Perpetual Security providing unlimited duration financing.
  • Financial Instrument Risk Characteristics, such as:
    • Safe-Haven Financial Instruments, such as:
      • Treasury Bond providing government-backed security.
      • Gold Exchange-Traded Fund offering precious metal exposure.
      • Investment-Grade Corporate Bond ensuring high-quality credit exposure.
      • Money Market Fund maintaining principal preservation focus.
      • Inflation-Protected Security guarding against purchasing power erosion.
    • High-Yield Financial Instruments, such as:
      • Junk Bond offering elevated interest returns.
      • Emerging Market Equity providing high-growth potential.
      • Leveraged Loan generating premium income streams.
      • Distressed Debt targeting recovery value opportunity.
      • High-Yield Municipal Bond balancing tax advantage with credit risk premium.
  • Financial Instrument Regulatory Frameworks, such as:
    • SEC-Registered Financial Instruments, such as:
      • Public Offering Security meeting disclosure requirements.
      • Investment Company Share adhering to Investment Company Act regulation.
      • Registered Bond Offering complying with Securities Act filing.
    • Alternative Financial Instruments, such as:
      • Private Placement Security utilizing exemption provisions.
      • Regulation D Offering targeting accredited investors.
      • Crowdfunding Security leveraging JOBS Act framework.
  • Financial Instrument Innovation Stages, such as:
    • Traditional Financial Instruments, such as:
      • Common Stock representing centuries-old ownership structure.
      • Corporate Bond utilizing established debt framework.
      • Government Security following historical sovereign issuance model.
    • Emerging Financial Instruments, such as:
      • Green Bond supporting environmental project financing.
      • Social Impact Bond linking investment return to social outcome.
      • Cryptocurrency enabling blockchain-based value transfer.
      • Tokenized Security utilizing distributed ledger technology.
      • Carbon Credit Derivative facilitating emissions reduction incentive.
  • ...
• Counter-Examples:
  • Physical Commodity, which constitutes tangible good rather than financial instrument contract.
  • Real Estate Property, which represents physical asset rather than financial instrument security.
  • Intellectual Property, which comprises intangible asset rather than financial instrument tradable contract.
  • Human Capital, which involves personal skill rather than financial instrument investment vehicle.
  • Non-Tradable Financial Contract, such as private placement or non-transferable insurance policy, which lacks financial instrument market transferability.
  • Currency Cash, which functions as direct medium of exchange rather than financial instrument investment contract.
  • Private Business Interest, which represents direct ownership stake rather than financial instrument standardized security.
  • Personal Loan Agreement, which constitutes direct bilateral arrangement rather than financial instrument marketable security.
  • Barter Arrangement, which involves direct good exchange rather than financial instrument monetary transaction.
  • Merchandise Gift Card, which provides retail purchase right rather than financial instrument investment value.
• See: Security Market, Investment Vehicle, Asset Class, Portfolio Component, Market Liquidity, Price Discovery Mechanism, Financial Regulation Framework, Capital Market Infrastructure, Risk Management Tool, Investment Strategy, Financial Intermediation, Market Microstructure, Trading System, Financial Asset, Financial Liability, Contract Law, Securities Regulation, Monetary Policy Transmission, Capital Formation, Financial Innovation, Wealth Management.

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References

2014

• (Wikipedia, 2014) ⇒ http://en.wikipedia.org/wiki/Financial_instrument Retrieved:2014-6-23.
  • A financial instrument is a tradable asset of any kind; either cash, evidence of an ownership interest in an entity, or a contractual right to receive or deliver cash or another financial instrument.

    According to IAS 32 and 39, it is defined as "any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity".

2013

• http://www.investopedia.com/terms/f/financialinstrument.asp
  • QUOTE: A real or virtual document representing a legal agreement involving some sort of monetary value. In today's financial marketplace, financial instruments can be classified generally as equity based, representing ownership of the asset, or debt based, representing a loan made by an investor to the owner of the asset. Foreign exchange instruments comprise a third, unique type of instrument. Different subcategories of each instrument type exist, such as preferred share equity and common share equity, for example. …

    … Financial instruments can be thought of as easily tradeable packages of capital, each having their own unique characteristics and structure. The wide array of financial instruments in today's marketplace allows for the efficient flow of capital amongst the world's investors.

• http://www.investopedia.com/terms/e/exchange.asp
  • QUOTE: marketplace in which securities, commodities, derivatives and other financial instruments are traded.

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