In this article, We learn about "Financial instrument ".Let's Go!
A Financial instrument is an asset, but specifically a contract that can be traded, transferred or exchanged.
For example, if you give someone an IOU for $100, and that person assigns that IOU to a third party, and the third party can then come to you and claim $010, then the note says "I owe you $100 "The note is a simple financial instrument.
A financial instrument involves one party owing something to another party: cash, partial ownership of a company, interest, or future delivery of another asset.
Includes stocks (stocks), loans, bonds, currencies, futures contracts, options, and U.S. Treasury bills and notes.
In addition to tools, there are other types of assets. An asset can be anything of value that has a price. All of these are assets:
- Barrel of oil
- Bushel of Corn
- Gold Bar
- Company Stock
- Rare paintings
- Stock Index Futures Contract
While corn, gold and oil are not financial instruments. But a contract for immediate or future delivery of corn, gold, or oil is a financial instrument.
Two financial instruments
There are two types of financial instruments:
Cash instruments are valued based on what the market says they are worth. Buyers and sellers agree on a price.
For debt instruments, the borrower and lender agree on the amount of the assignment or loan, as well as the interest rate and repayment terms.
Derivatives, as the name suggests, derive their value from the value of something else: an asset, a measurement, an interest rate or other variable, or even other derivatives.
The price change of the underlying asset affects the derivative.
For example, if the price of Netflix stock rises from $500 to $600, the value of options contracts based on that underlying asset will also tend to rise. In this case, the underlying asset is Netflix stock.
The exact increase in derivatives prices is not predetermined by a fixed formula. The price is determined by the buyer and seller.
Since Netflix stock is now worth $100 more, it makes sense that derivatives based on the asset would be more valuable as well. Sellers will demand higher prices and buyers will be willing to pay higher prices.
It is important for traders to have accurate price data so they can ensure they are seeing the true price of the underlying asset.