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Financial Instruments

Financial instruments can be categorized by form depending on whether they are cash instruments or derivative instruments:

Alternatively, financial instruments can be categorized by “asset class” depending on whether they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorised into short term (less than one year) or long term.

Foreign Exchange instruments and transactions are neither debt nor equity based and belong in their own category.

 

Combining the above methods for categorization, the main instruments can be organized into a table as follows:

Asset class Instrument type
Securities Other cash Exchange-traded derivatives OTC derivatives
Debt (long term)
> 1 year
Bonds Loans Bond futures
Options on bond futures
Interest rate swaps
Interest rate caps and floors
Interest rate options
Exotic instruments
Debt (short term)
≤ 1 year
Bills, e.g. T-bills
Commercial paper
Deposits
Certificates of deposit
Short term interest rate futures Forward rate agreements
Equity Stock N/A Stock options
Equity futures
Stock options
Exotic instruments
Foreign exchange N/A Spot foreign exchange Currency futures Foreign exchangeoptions
Outright forwards
Foreign exchange swaps
Currency swaps

Some instruments defy categorization into the above matrix, for example repurchase agreements (repo’s).

US Big 4 Derivatives exposure

According to the Comptroller of the Currency, four of the largest U.S. banks are walking a tightrope of risk, leverage and debt when it comes to derivatives.  Just check out how exposed they are… JPMorgan Chase Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars) Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars) Citibank …

Bonds

To an investor just starting out, bonds can be more than a little intimidating. First, there are many different types of bonds – you’ve got corporate bonds, retail bonds, government bonds or ‘gilts’ and index-linked bonds to name but a few. And then there’s the jargon – what on earth is a coupon when it’s …

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