Financial

Instruments
GROUP 1
Adarsh Swaika
15PGPIM02
Devasmita Mishra 15PGPIM13
Divyansh Parihar 15PGPIM14
Nidhi Narang 15PGPIM23
Kaveri Gupta 15PGPIM28

What is a Financial
Instrument
Financial instrument is any contract
that gives rise to a financial asset of
one entity and a financial liability or
equity instrument of another entity.

Types Of Financial
Instrument
Equity Finance covers:
Equity securities:
oEquity in mutual funds
oEquity in money market mutual funds
Reinvestment of earnings
Other equity(not including equity in insurance
technical reserves and pension funds)

Types Of Financial
Instrument
Debt instruments cover:
Debt securities:
oLong term
oShort term
Loans
Currency and deposits
Accounts receivables/payable
Trade credit and advances
Other accounts receivable/payable
Other debt instruments

Other Instruments
Monetary gold -

consists only of standard

bullions of gold held by the central bank or
government as part of official reserves.

SDR -

international reserve assets created by the

IMF and allocated to member countries to supplement
existing official reserves

Financial derivatives -

are linked to a
specificfinancialinstrument or indicator or
commodity, and through which specificfinancial risks
can be traded.

Other Instruments
Employee stock options-

contract issued by an employer

to an employeeto purchase a set amount of shares of
companystockat a fixed price for a limited period of time

ADR - Anegotiablecertificate issued by a U.S. bank

representing a specified number of shares (or one share) in a
foreign stock that is traded on a U.S. exchange

GDR - certificate issued by a depository bank, which

purchases shares of foreign companies and deposits it on
theaccount

Inventive Financial
Instruments
Collateralized Mortgage Obligation:
-mortgage-backed security
-principal repayments are organized according to
their
maturities on risk
-receives the mortgage repayments and
owns the mortgages it receivescash
flowsfrom (called a pool

Inventive Financial
Instruments
Collateralized debt obligation:
-pools together cash flow-generating assets

and

repackages this asset

-the pooled assets such as mortgages,
bonds
and loans
are essentially debt
obligations serve as collateral for the CDO
-the senior tranches of a CDO generally have a
higher credit
rating and offer lower coupon
rates
-junior tranches offer higher coupon rates to
compensate for their higher default risk

Benefits of using financial

instruments
Ease of Use:
better to usefinancial instrumentsthan actual cash.
sending a SWIFT message that acts as an instrument
ability to negotiate afinancial instrumentbased on certain
terms.
Security:
security measures in place guarantee their worth only those
that aremeantto are able to reap the benefits of the
document.
requiring an instrument versus cash for payment of products
or services offers a much more secureguarantee of payment
than simply the promise to pay cash. ability to negotiate
afinancial instrumentbased on certain terms.

Benefits of using financial

instruments
Income Potential
Manyfinancial instrumentsincrease in value over time due to
interest accrual. This means that there is a potential
forsignificantreturn on investment that does not exist with cash.
Collateral
These types of instruments can be used as collateral for a loan
or to secure other transactions, such as those
involvinginternational trade.
Perception
Regardless of what technological advances there have been in
the recent years, there is still a perceptionof security and
professionalism attached to the use offinancial instrumentstoday.