Abstract: In this paper we will define financial instrument. Basically any form of medium for funding is called financial instrument. It can be classified into cash instruments and derivative instruments. Financial instruments can further be classified into equity based financial instruments and debt based financial instruments.
In general, any type of funding medium like, bonds, options, bills of exchange, is recognized as a financial instrument. By using the financial instruments one can borrow from the money market.
Financial instruments can be differentiated into two types, namely, cash instruments and derivative instruments.
The market, obviously money market, and sets the value of the cash instruments directly. Mainly the readily transferable securities, deposits, loans are termed as cash instrument.
On the other hand derivative instruments are a kind of financial instrument whose value is determined using other financial instrument. Derivative instruments are categorized into two things: over the counter derivatives and exchange traded derivatives.
The financial instruments can also be categorized, on the basis of asset class, into two things: equity based financial instruments, which reflects the entity ownership, and debt based financial instruments.
Moreover, debt based financial instruments are further divided into two parts: short-term debt based financial instruments and long-term debt based financial instruments.