FINANCIAL INSTRUMENT

DEFINITION:-
Financial instruments are assets that can be
traded, or they can also be seen as packages of
capital that may be traded. Most types of financial
instruments provide efficient flow and transfer of
capital all throughout the world's investors. These
assets can be cash, a contractual right to deliver or
receive cash or another type of financial
instrument, or evidence of one's ownership of an
entity.
TYPES OF FINANCIAL INSTRUMENT
 Primary or Direct Instrument
 Secondary or Indirect Instrument
 Derivatives

1. Primary Instrument:-
A Primary instrument is a financial investment
whose price is based directly on its market value .
A financial instrument can be any type of
financial investment that is priced based on its
own value.
 Primary instrument or direct securities are
issued directly by borrowers to lenders.
 Equity shares:- Equity shares represent the
ownership of a company and capital raised by the
issue of such shares is known as ownership capital
or owner’s funds. They are the foundation for the
creation of a company.
Preference shares:- Preference shares are shares
in a company that are owned by people who have
the right to receive part of the company's profits
before the holders of ordinary shares are paid.
 Debenture :- A debenture is a type of debt
instrument unsecured by collateral Since
debentures have no collateral backing , debentures
must rely on the credit worthiness and reputation
of the issuer for support . Both corporations and
governments frequently issue debentures to raise
capital or funds.

2.Secondary Instrument:-
Indirect securities are not directly issued by
borrowers to lenders . These securities are issued
via a financial intermediary to an ultimate lender.
Indirect securities include mutual fund units ,
security receipts , securitized debt instrument.
 Mutual Fund:-
A mutual fund is a type of financial vehicle made
up of a pool of money collected from many
investors to invest in securities like stocks, bonds,
money market instruments, and other assets.
Mutual funds issue units to investors, which
represent an equitable right in the assets of the
mutual fund.
Security Receipts :- Security receipts are bonds
issued by Reconstruction companies to banks
when they buy bad loans from them.
 Securitized Debt Instruments :- Securitized Debt
Instruments are products of securitization , which in
turn is the process of passing debts on to entities that in
turn break them into bonds and sell them.
3. Derivatives :-
Derivatives are instrument whose value is derived from
the value of one/more basic variables called the
underlying asset . They are forwards , futures and
options.
 Forward contracts :- Forward contracts are agreements
to exchange an asset, for cash, at a predetermined
future date today . At the end of the contract, one can
enter into an offsetting transaction by paying the
difference in price.
 Future contracts :- Future contracts are similar to
Forward contracts but are highly standardized
traceable contracts unlike the letter. They are
standardized in terms of size , expiry date and all
other features.
Options :- Options establish a contract between
two parties concerning the buying or selling of an
asset at a reference price. Buyer of the option
gains the right , but not the obligation , to engage
in some specific transaction on asset , whereas the
seller incurs. The obligation to fulfill the
transaction if requested by buyer.
Key benefits of the Financial
Instruments :-
Key benefits :-
 Create mark-to-market valuations for any required
portion of your portfolio and send those entries off to
other internal systems
 Calculate and Post financial accounting entries for any
modeled instrument
 Integrate into G Treasury’s Funds Transfers module for
approving, scheduling, and settlement of all required
funding
 Customize cash schedules that automatically tie
directly into G Treasury’s worksheets for best-of-breed
liquidity management reporting.