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chapter 4

Chapter 4 discusses financial instruments, which are contracts that create financial assets for one entity and financial liabilities or equity instruments for another. It categorizes financial instruments into financial assets (such as cash, equity instruments, and receivables) and financial liabilities (like loans and bonds), and covers derivatives including futures contracts, forward contracts, and call options. Additionally, it highlights risks associated with foreign currency loans and interest rate swaps.

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14 views

chapter 4

Chapter 4 discusses financial instruments, which are contracts that create financial assets for one entity and financial liabilities or equity instruments for another. It categorizes financial instruments into financial assets (such as cash, equity instruments, and receivables) and financial liabilities (like loans and bonds), and covers derivatives including futures contracts, forward contracts, and call options. Additionally, it highlights risks associated with foreign currency loans and interest rate swaps.

Uploaded by

Juan John
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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CHAPTER 4

FINANCIAL INSTRUMENTS
Any contract that gives rise to a financial asset of one entity and a financial
ability or equity instrument of another entity.
FINANCIAL INSTRUMENTS:

Financial assets Financial Liabilities

1. Cash 1. Loans Payable

a. Petty Cash 2. Notes Payable

b. Cash in Banks 3. Accounts Payable

2. Equity Instrument of Another 4. Bonds


entity

3. Receivables

Equity instruments

1. Ordinary Shares

2. Preferred Shares

3. Call Options (Purchase ordinary shares in exchange for a financial asset)

Derivatives
Derives value from expected or actual changes in the price of an underlying
asset.

Futures Contracts - Seller is required to deliver a commodity at a


predetermined price on a specified date.

Two Type:

Commodity Futures Contract

Purchased for commodities

Financial Futures Contract

Purchased as Investment

Purchased as hedge to offsest potential risks,

CHAPTER 4 1
Forward Contract - Buy or sell an asset at a specified price on a future
date

Calls for delivery on a specific date

It is not traded on a market exchange (it is regulated on a future


exchange)

Does not call for a daily cash settlement (only paid when closed out)

Has an obligation to exercise the contract within the specified period

Call Options

Gives the right to buy or sell a financial instrument at a specified price


and a given time period.

Holder has no obligation to exercise the option

Purchased as hedge to offset risks

Foreign Currency Future Loans

Loans are now affected by changing exchange rates thereby introducing


a new type of risks.

Interest Rate Swaps

Cash flows are exchanged based on a series of specified dates based on


the notional amount and fixed and floating rates.

CHAPTER 4 2

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