Financial instruments are financial assets of any kind. But the prime criterion is that the asset should be tradable. Cash is the most liquid financial asset. Any evidence that depicts an ownership right or interest in any other financial asset can also be termed as a financial asset. Even a contractual right to receive or deliver any financial instrument is termed as financial instrument.
Financial instruments can be broadly categorized in to 2 types:
- Cash instruments
- Derivative instruments
Instruments whose value depends directly on the market are termed as cash instruments while derivative instruments are those whose value depends on the value of some other underlying assets
Foreign currency or foreign exchange related assets doesn’t fall under any of the other category, they are a unique category of their own.
Some financial experts also divide the financial instruments based on their term of maturity. If the maturity is less than one year, they are classified as short term financial instruments, while if the tenure is more than one year, they are termed as long term financial instruments.
Financial instruments are used to hedge or speculate the returns of one’s assets. Various instruments provide various returns, while some provide fixed returns, the others provide market oriented returns.
