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Types of Financial Instruments

The financial instruments can be divided into two types. One is cash instruments and the other one is derivative instruments.

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Types of Financial Instruments

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  1. Breaking Down Financial Instrument

  2. Since financial instruments carry such a vast array of products, it can be difficult to answer if someone asks what a financial instrument is because no definition could perhaps include all the elements in a single statement. • None the less, there is significant aspect which is more or less common to various financial instruments and based upon that, it can be answered what could be a financial instruments or what constitutes a financial instrument.

  3. A financial instrument is essentially an asset. And it is an asset that can be traded. • That is perhaps the statement that covers the most significant aspect of financial instruments. • It has to be an asset and there should be a way of buying and selling a financial instrument.

  4. Since financial instruments could be traded, it can be seen as an investment of capital or you can also realize it as, cash inflow and outflow of a system. • Financial instruments make it easy to flow the cash in terms of worldwide investors. • One great feature of financial instruments is, it can be real or it can be virtual.

  5. But the point to notice here is that, be it real or be it virtual, the owner of the financial instruments is having an asset. • Explaining this point further, there can be another definition of financial instruments can be drawn. • For example, financial instruments are contracts.

  6. It is a contract that is signed between two parties where one party gains the asset and the other party and for the other party, it becomes the liability. • Now, the financial instruments can be divided into two types. • One is cash instruments and the other one is derivative instruments.

  7. Cash instruments are those instruments which are directly influenced and determined by the market. • Cash instruments are easily transferable. • A derivative instrument is a bit different from the cash instruments. • It can be a contract between two or more parties.

  8. And the value of this contract is agreed upon underlying financial asset, commodities, interest rates, currencies etc. • Hence there is a big difference between cash instruments and derivative instruments. • A cash instrument is directly influenced by the market

  9. Means it is directly depended upon the market. • But a derivative instrument doesn’t depend upon the market. • As it has been said before, the value of a derivative contract could be based upon such as for example underlying financial asset.

  10. THANKS • Hence, it is free from the ups and down of the market generally.

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