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03 Financial Instruments

A summary overview of the definiton of financial instruments, and what are its examples. One of the references used here is the book of Cabrera.

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Carmela Peduche
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95 views2 pages

03 Financial Instruments

A summary overview of the definiton of financial instruments, and what are its examples. One of the references used here is the book of Cabrera.

Uploaded by

Carmela Peduche
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Polytechnic University of the Philippines – Alfonso Extension Campus

Financial Markets and Institutions


03 – Financial Instruments

Chapter Objectives
1. Describe financial instruments and its function.
2. Explain what financial assets, financial liabilities, and equity instruments are.
3. Describe derivatives and its purpose.

Financial Instruments
 A financial instrument is a contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.
 A contract is an agreement between two or more parties that has clear economic consequences
that the parties have little discretion to avoid as it is enforceable by law.

Financial Assets
 Financial asset is any asset that is:
o Cash (cash in bank/ cash on hand)
 petty cash
 demand, savings, time deposits
 undeposited checks
 foreign currencies
 money orders
 bank drafts
o Equity instrument of another entity
 Stock certificates
 Publicly listed securities
o Derivative financial assets
 Futures contract
 Forward contract
 Call options
 Foreign currency futures
 Interest rate swaps
o Receivable
 Trade receivables
 Promissory notes
 Bond certificates

Financial Liabilities
 Financial liabilities is any liability that is
o A contractual obligation
 To deliver cash or another financial asset to another entity
 To exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavorable to the entity
o A contract that will be settled in the entity’s own equity instruments and is:
 A non-derivative for which the entity is or may be obligated to deliver a variable
number of the entity’s own equity instruments
Prepared by: Carmela Peduche
Reference: Cabrera, Ma. Elenita B. (2020) Financial Markets and Institutions, 2020 Edition. Manila
Polytechnic University of the Philippines – Alfonso Extension Campus
Financial Markets and Institutions
03 – Financial Instruments

 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.
 Examples include
 Accounts and notes payable
 Derivative financial liabilities
 Obligations to deliver shares for cash

Equity Instruments
 Equity instruments are contracts that evidence a residual interest in the assets of the entity after
deducting all of its liabilities.
o Ordinary shares
o Preference shares
o Warrants or written call options

Derivative Financial Instruments


 Derivatives are financial instruments that derive their value on contractually required cash flows
from some other security or index. Derivatives usually comprise:
o Designated future date
o Predetermined price
o Underlying asset
 Examples of derivatives include:
o Futures contracts – an agreement between a buyer and seller that requires the seller to
deliver a particular commodity at a designated future date, at a predetermined price.
 Financial futures contract – when the commodity is a financial instrument used
either as an investment or hedge against risks on future prices
o Forward contracts -

Prepared by: Carmela Peduche


Reference: Cabrera, Ma. Elenita B. (2020) Financial Markets and Institutions, 2020 Edition. Manila

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