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Instrument


Broadly speaking, an instrument is a physical or electronic document that bears an intrinsic financial or monetary value or is used for value transfer between two parties or more. Specifically, an instrument is a contractual arrangement/ set-up that gives rise to a financial asset for a party and a financial liability or equity ownership/ interest for another.

Examples of instruments (financial instruments) that have monetary value is cash, checks, promissory notes, etc. Instruments that have financial value include bonds, stocks, mortgages, loans, insurance policies, etc.

As a distinct category of instruments, financial assets include cash, trade receivables (contractual rights to receive cash or any other financial assets from other parties), contractual rights to exchange financial rights with others, equity interest in other entities, etc. On the other hand, financial liabilities include contractual obligations to pay a monetary amount to others (e.g., trade payables) and to exchange financial obligations with  others, etc.

Instruments include both primary instruments (non-derivative instruments) and derivative instruments. Derivatives create rights and obligations that involve the transfer of financial risks associated with an underlying primary financial instrument between the parties. Such instruments do not entail in a transfer of the underlying primary instrument, and as such do not necessarily result in any transfer on maturity date.

Primary or non-derivative instruments are generally classified as equity instruments and debt instruments.



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