Instruments

Instruments

Definition and types of financial instruments

A financial instrument is a document that is sold or transferred to receive cash.

 

Financial instruments in modern times have many different forms. For this reason, for convenience and systematization, they are classified according to the following criteria:


I. By types of financial market:

1. The securities market, where transactions are carried out with certain types of securities.

2. Foreign exchange market - financial transactions with a currency unit and documents, as well as some types of securities are carried out here.

3. Credit market - aimed at circulation of credit funds and settlement documents.

4. Precious metals market - represented by such metals as gold, silver, platinum and palladium, the purchase of which is aimed at further formation of financial reserves and tezavratsii, that is, their accumulation. This also includes some securities quoted in gold (futures, gold certificates, etc.).
 


II. By the circulation period, financial instruments are divided into:

1. Perpetual - securities that do not have a specific established period of existence. This group includes depositary receipts, shares and others.

2. Urgent - characterized by the existence of a fixed period of existence. These are various types of securities (stocks, bills of exchange, futures, etc.) and all the variety of bank deposits in the bank.
 


III. By importance (priority forms of the 1st order):

1. Basic or financial instruments of the 1st order - as a rule, this group includes securities (stocks, bonds) and, to a lesser extent, other types of financial instruments characterized by the presence of direct property rights or credit relations.

2. Secondary, derivatives or financial instruments of the 2nd order - represented mostly by options and futures contracts. This group includes only securities that guarantee the right of their owner to carry out the sale and purchase of securities, currency, goods and other things in accordance with the conditions established in the preliminary form in the future.
 


IV. By the fixed profitability:

1. With fixed income - financial instruments that, upon their redemption, expiration or payment of intermediate income, provide their owner with a certain fixed income, regardless of the market situation.

2. With floating income - in this case, the owner's income is not fixed, but varies depending on the state of the issuer's finances, as well as fluctuations in the market situation. The level of income can be directly dependent on the refinancing rate of the Central Bank, that is, its increase contributes to an increase in income and vice versa.

 


The above classification considers only general characteristics of groups of financial instruments. Further, we will consider their individual types and characteristics, depending on the form of the financial market. Comparison will be made with the securities market.

1. Share - is an equity security that gives its owner the right to participate in the management of the joint-stock company and the right to receive part of the profit in the form of dividends. This is the most common form of financial instruments in the securities market. In the credit market, its analogue is financial assets, which act as the main object of relations between lenders and borrowers. In the foreign exchange market, these are the monetary units of countries, and in the precious metals market - gold, silver and other metals, which act as monetary assets and are also the main object of financial relations.

2. A bond is an issue-grade debt security that guarantees the owner the right to receive its par value at the agreed time from the person who issued this bond, that is, the issuer.

On the credit market, bonds are provided in the form of "checks" (French chèque, English check / check) - securities containing the drawer's order to the bank to make the payment of the amount indicated in it to the check holder. The foreign exchange market uses documentary foreign exchange letters of credit for financial transactions. In the precious metals market, bonds are presented in the form of derivatives.

3. A certificate of deposit is a security confirming the amount of the deposit in the bank and the rights of the depositor (the holder of the certificate provided by a legal entity) to receive, after the expiration of the established period, the amount of the deposit and the specified interest in the bank or its branch.

In the credit market, in this case, letters of credit are used - conditional monetary obligations accepted by banks on behalf of the ordering parties (that is, payers under the letter of credit).
The foreign exchange market applies foreign currency bank checks, presented in the form of orders from banks that own foreign exchange holdings (cash deposits held in foreign banks), to their correspondents to transfer the amount indicated in the check to the check holder.

4. Derivatives are classified into a separate group of financial instruments. These include, in addition to the previously named futures and options contracts, the so-called "swaps". In the credit market, derivatives are represented by promissory notes (in translation from German wechsel - "exchange") - securities, issued in a strictly established form, giving the right to the person who owns the bill (the holder of the bill) to receive from the debtor the amount specified in the bill. Bills are also used in the foreign exchange market as a document issued by banks to their foreign correspondents. There are also so-called transferable currency commercial bills. They are issued by persons importing goods to exporters.

It should also be noted that, in addition to the above, the loan market is characterized by the use of collateral documents - legal documents testifying to the provision of property or valuables owned by the borrower as collateral to the lender.


Among other financial instruments used in the foreign exchange market, there are:

1. Foreign exchange futures contracts are a derivative financial instrument of currency trading on an exchange where a buyer agrees to purchase one currency in exchange for another in the future at a pre-negotiated value at the time of the contract.

2. Foreign exchange options contract, giving the right to refuse to buy or sell foreign currency.

3. Currency "swap", that is, a combination of two opposite conversion transactions for the same amount with different value dates.

4. Other financial instruments of the foreign exchange market - repo agreements and the like.

 

All of the above financial instruments are constantly changing due to changes in the legal norms for regulating the market by the state, increasing experience and other factors.

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