RSM221H1 Chapter Notes - Chapter 16: Financial Instrument, Financial Intermediary, Underlying
8 Nov 2016
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Document Summary
Financial instruments are contracts that create both a financial asset for one party and a financial liability or equity instrument for the other party. Primary financial instruments include most basic financial assets and financial liabilities, such as receivables and payables, as well as equity instruments, such as shares. Called derivatives because they derive (get) their value from an underlying primary instrument, index, or non-financial item. Derivatives may trade on exchanges and over-the-counter markets: over-the-counter markets are less formal markets and often involve financial institutions as the financial intermediary. Where there is a market for the derivative, it is easier to value. Accounting standards define derivatives as financial instruments that create rights and obligations that have the effect of transferring, between parties to the instrument, one or more of the financial risks that are inherent in an underlying primary instrument.
