Stocks, futures, gold, foreign exchange, insurance policies, etc. are also called financial products, financial assets, and securities.
Financial instruments?
Financial instruments refer to financial assets that can be traded in financial markets. Financial instruments refer to people who can use them to play various "tool" roles in the market, especially in different financial markets, in order to achieve different purposes. For example: Enterprises can achieve financing purposes by issuing stocks and bonds. Stocks and bonds are corporate financing tools.
Basic classification
Financial instruments are divided according to their liquidity and can be divided into two categories:
Legal currency symbols
This It refers to modern credit currency. Modern credit money comes in two forms: banknotes and bank demand deposits. It can be regarded as a liability of the bank. It has achieved generally accepted qualifications among the public, and its transfer will not cause any trouble. This type of complete liquidity can be seen as an extreme of financial instruments.
Securities
These financial instruments also have the characteristics of circulation, transfer and acceptance, but there are certain conditions attached. Including certificates of deposit, commercial paper, stocks, bonds, etc. Their acceptance depends on the nature of the financial instrument.
Long-term bonds (more than one year)
⑴Securities=bonds
⑵Other cash=loans
p>⑶Exchange-traded financial derivatives = bond futures (bonds futures)
⑷Bond futures options (option on bonds futures)
⑸Over-the-counter financial derivatives =Interest rate swap
⑹Interest rate cap and floors
⑺Interest rate option
⑻Exotic instrument
Short-term debt (less than one year)
⑴Securities = banknotes (bills, Commercial Paper)
⑵Other cash = deposits, time deposits (CD)< /p>
⑶Exchange-traded financial derivatives = short term interest rate futures (short term interest rate Futures)
⑷Over-the-counter financial derivatives = Forward rate agreement
⑸Ownership (equity): securities = stocks
⑸Other cash = none
⑹Exchange-traded financial derivatives = stock options (stock option)
⑺Futures (equity futures)
⑻Over-the-counter financial derivatives = Stock options/Exotic instruments
Foreign exchange transactions
⑴Securities (securities)=None
⑵Other cash =None
⑶Exchange-traded financial derivatives=Spot foreign exchange
⑷Foreign exchange futuresCurrency futures< /p>
⑸Taiwan financial derivatives category=Foreign exchange options/Outright forward/Foreign exchange swap/Currency swap
For derivative financial instruments that are not recognized on the balance sheet or have been measured at cost (excluding hedging instruments) shall be measured at fair value on the date of initial execution, and retained earnings shall be adjusted at the same time.
For embedded derivative financial instruments that should be separated from hybrid instruments in accordance with the provisions of "Accounting Standards for Business Enterprises No. 22 - Recognition and Measurement of Financial Instruments", they shall be separated from hybrid instruments and consolidated on the date of first implementation. Treated separately, except where the fair value of embedded derivative financial instruments is difficult to reasonably determine.
For non-derivative financial instruments issued by an enterprise that contain liability and equity components, the liabilities and equity components should be reported on the first implementation date in accordance with the provisions of "Accounting Standards for Business Enterprises No. 37 - Presentation of Financial Instruments" Spin-offs, except where the fair value of the liability component is difficult to reasonably determine
It is generally believed that financial instruments have the following characteristics:
Repayment period
Repayment period refers to The time that elapses from the time the borrower receives the loan to the time the loan is repaid in full. Various financial instruments generally have different repayment terms when issued. In the long term, there are 10 years, 20 years, and 50 years. There is also a kind of permanent debt, in which the borrower agrees to pay interest indefinitely in the future but never repays the principal. This is the extreme end of the long term. At the other extreme, bank demand deposits can be redeemed at any time, and their repayment period is effectively zero.
Liquidity
This refers to the ability of a financial asset to avoid losing value when converted into currency.
In addition to currency, various financial assets have varying degrees of imperfect liquidity. If other financial assets want to be converted into currency before maturity, they will either receive a certain discount or pay certain transaction fees. Generally speaking, if a financial instrument has the following two characteristics, it may have higher liquidity. Characteristics: First, the debtor issuing financial assets has high credibility and can perform its obligations in a timely and complete manner in past debt repayments. Second, the debt has a short maturity. In this way, it is very little affected by market interest rates, and the possibility of losses when converting it into cash is very small.
Risk
Refers to the risk of loss of principal invested in financial instruments. Risks can be divided into two categories: First, the risk that the debtor will not perform its debts. The size of this risk mainly depends on the debtor's creditworthiness and the debtor's social status. Another type of risk is market risk, which is the risk that the market price of financial assets will fall as market interest rates rise. When interest rates rise, the market prices of financial securities fall; when interest rates fall, the market prices of financial securities rise. The longer the repayment period of a security, the greater its price will be affected by changes in interest rates. Generally speaking, the safety of principal is inversely proportional to the repayment period, that is, the longer the repayment period, the greater the risk and the smaller the safety. The safety of principal is directly proportional to liquidity and the creditworthiness of the debtor.
Profitability
refers to the characteristics of financial instruments that can bring income to the holder regularly or irregularly. The profitability of financial instruments is measured by the rate of return. Its specific indicators include nominal rate of return, actual rate of return, average rate of return, etc.
Because financial instruments have off-balance sheet risks, both international accounting standards and U.S. GAAP require companies that operate financial instruments to disclose information about financial instruments in the main body and notes of financial statements. Most of the prescribed accounting treatments related to the accounting treatments of derivative financial instruments are included in the standards for bonds payable, investments, and shareholders' equity.