PRINTABLE LEARNING MATERIAL

Module 1- Topic4: Financial Instruments

LEARNING OUTCOME:
Compare and contrast the varied financial instruments. (ABM_BF12-IIIa-4)

Understanding Financial Instruments

Base on the Market Business News (2020), a financial instrument is a monetary

contract between parties. We can create, trade, or modify them. A financial instrument
may be evidence of ownership of part of something, as in stocks and shares. Bonds,
which are contractual rights to receive cash, are financial instruments. Checks and
securities are also Financial instruments.

Types of Financial Instruments

According to Will Kenton (2020), the different types of instruments are the following:

Cash Instruments

 are directly influenced and determined by the markets.

 these can be securities that are easily transferable.
 cash instruments may also be deposits and loans agreed upon by borrowers and
lenders.

Derivative Instruments

 based on the vehicle’s underlying components, such as assets, interest rates, or

indices.
 An equity options contract, for example, is a derivative because it derives its
value from the underlying stock. The option gives the right, but not the obligation,
to buy or sell the stock at a specified price and by a certain date. As the price of
the stock rises and falls, so too does the value of the option although not
necessarily by the same percentage.
The image below explains the difference between the cash and derivative instruments:

(Lifted from: https://www.proschoolonline.com/blog/financial-instruments-different-types-of-financial-instruments)

Licensing & Attributions / References

 Image of Financial Instruments. https://www.proschoolonline.com/blog/financial-instruments-
different-types-of-financial-instruments
 Kenton ,W. (2020). Retrieved January 7, 2021, from
https://www.investopedia.com/terms/f/financialinstrument.asp
 Market Business News. (2020). Retrieved January 7, 2021, from
https://marketbusinessnews.com/financial-glossary/financial-instrument/