Financial Instruments
Financial Instruments
Financial Instruments
• Financial instruments are contracts that gives rise to financial asset to one
equity, and a financial liability or and equity instument to another entity.
• Short-term loans – short-term loans normally involve loans with maturity of one
year or less. However, for reconciliation of different
• practices between the countries, short-term loans can be defined
• including loans with maturity of up to two years. All loans that will
mature upon request are classified as short-term, even if it is expected that
these loans will not be repaid within one year.
• Medium-term loans - depending on practices applied in countries, loans with
maturity from 1 to 5 years are classified as medium-term loans.
• Long-term loans – long-term loans include the loans with maturity that
• exceeds those of short- and medium-term loans.
• According to statistical classification, repo agreements, financial leasing,
factoring operations and other similar agreements are classified under the category of
loans.
Shares and other equity
• Shares are financial instruments that represent or provide evidence
on ownership rights of the holders over enterprises or organizations,
including financial institutions. Shares and other equity comprise all
• instruments and records acknowledging, after the claims of all creditors
have been met, claims on the residual value of a corporation (companies,
corporations). Normally, these instruments entitle the holders both of
distributed profits of enterprises or organizations, and the residual
• value of the assets in the event of liquidation. Ownership of equity is
usually evidenced by shares, stocks, participation's and similar documents.
This category also includes preferred shares that provide for participation in
the residual value on dissolution of an enterprise.
• Types of equity are:
• ordinary shares that provide for ownership right in an enterprise
or corporation;
• preferred shares that provide right for claim over residual value
of an enterprise,
• equity participation in limited liability companies.
Debentures or bonds
• The term ‘creditorship securities’ also known as ‘debt capital’
represents debentures and bonds. They occupy a significant place in
the financial plan of the company. Adebenture or a bond is an
acknowledgement of
• A debt. It is a certificate issued by a company under its seal
acknowledging A debt due by its holders.
OPTIONS SWAPS
FORWARDS/
FUTURES
FORWARDS
• In a forward contract, the counterparties agree to exchange, on
a specified date, a specified quantity of an underlying item (financial
or real asset) at an agreed-upon contract price.
• Execution of a forward contract is mandatory but only in the case of
expiry of the period specified in the contract. Each of the counterparties
has both claim and liability upon execution. The net value of the
instrument (difference between claims and liabilities) is zero.
FUTURES
• A future contract is an agreement between seller and the buyer that
calls for the seller to deliver to the buyer a specific quantity, grade of an
identified commodity at a fixed time in the future and at a price agreed
to when the contract is first entered into.
OPTIONS
• The buyer of an option acquires the right but not
the obligation to purchase or sell a specific asset.
Options too, contain contingency: the acquirer of an
option may not wish to exercise it. The buyer pays
a certain amount to the seller of the option and thus
acquires the right but not the obligation to sell or
purchase a specified item at an agreed-upon price
in a specified period. The buyer of an option can
sell the option contract, i.e. the right to exercise the
option, whereby the option obtains a market value.
The statistical recording of options should be
carried out in the same way as for the forwards.
SWAPS
• A swap represents a spot purchase (sale) of a financial asset with a
condition of forward sale(purchase).
• Swap agreement
• is a type of a forward, in which the parties agree to exchange
different currencies, that is to buy (sell) any currency for another
• currency in spot market and concluding at the same time a repurchase
agreement on sale (purchase) of these currencies in forward market at prices
determined beforehand, pursuant to the rules specified.
• Types of SWAPs
• Interest rate Swaps
• Currency Swaps
LETTER OF GUARANTEE
• Guarantee involves an obligation by the economic entity to
assume the other entity’s financial obligation if that other party
defaults.To issuer, a guarantee is not treated as a financial liability
as far as theparty, to whom the guarantee has been issued, has
not shown its inability to meet such a liability. Therefore, until
availability of this condition, letters of guarantee will be
recorded asoff-balance sheet items.
LETTER OF CREDITS
• A letter of credit is an obligation to make payment against
• documents received. The amounts to be paid upon receipt of the
documents become liabilities of the bank. Letters of credit are
used to finance international trade operations
FINANCIAL COMMITMENTS
• Equity Warrants- The equity warrants is a paper attached to a bond preferred stock
that gives the holder the right to buy a fixed number of company’s equity shares at a
predetermined price at a future date.
• Secured Premium Notes(SPNs)- The secured premium note is a tradable instrument with
detachable warrant against which the holder gets equity shares after a fixed period of time.
• Callable Bond- A callable bond is a bond that can be called in and paid off by issuer at a price,
called the ‘call price’ stipulated in the bond contract. It gives the advantage to issuer company to call
the existing bonds if the interest rates fall in the market below the bond’s coupon rate.
• Floating/Variable or Adjustable Rate Bonds- The rate of interest payable on these bonds varies
periodically depending upon the market rate of interest payable on the gilt-edged securities.
• Deep Discount Bonds(DDBs)- The deep discount bond does not carry any interest but it is sold
by the issuer company at a deep discount from its eventual maturity(normal) value.
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