Financial instruments

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Financial instruments package financial capital in readily tradeable forms - they do not exist outside the context of the financial markets. Their diversity of forms mirrors the diversity of risk that they manage.

Financial instruments can be categorised according to whether they are cash instruments or derivatives of other instruments.

Cash instruments can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.
Derivative instruments can be divided into exchange traded derivatives and over-the-counter (OTC) derivatives.

Alternatively they can be categorised by 'asset class' depending on whether they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorised into short term (less than one year) or long term. Foreign Exchange instruments and transactions are neither debt nor equity based and belong in their own category.

Combining the above methods for categorisation, the main instruments can be organized into a matrix as follows:

ASSET CLASS INSTRUMENT TYPE
Securities Other cash Exchange traded derivatives OTC derivatives
Debt (Long Term)
>1 year Bonds Loans Bond futures
Options on bond futures Interest rate swaps
Interest rate caps and floors
Interest rate options
Exotic instruments
Debt (Short Term)
<=1 year Bills, e.g. T-Bills
Commercial paper Deposits
Certificates of deposit Short term interest rate futures Forward rate agreements
Equity Stock N/A Stock options
Equity futures Stock options
Exotic instruments
Foreign Exchange N/A Spot foreign exchange Currency futures Foreign exchange options
Outright forwards
Foreign exchange swaps
Currency swaps

ASSET CLASS	INSTRUMENT TYPE
Securities	Other cash	Exchange traded derivatives	OTC derivatives
Debt (Long Term) >1 year	Bonds	Loans	Bond futures Options on bond futures	Interest rate swaps Interest rate caps and floors Interest rate options Exotic instruments
Debt (Short Term) <=1 year	Bills, e.g. T-Bills Commercial paper	Deposits Certificates of deposit	Short term interest rate futures	Forward rate agreements
Equity	Stock	N/A	Stock options Equity futures	Stock options Exotic instruments
Foreign Exchange	N/A	Spot foreign exchange	Currency futures	Foreign exchange options Outright forwards Foreign exchange swaps Currency swaps

Some instruments defy categorisation into the above matrix, for example repurchase agreements.

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