Polytechnic University of the Philippines – Alfonso Extension Campus
Financial Markets and Institutions
03 – Financial Instruments
Chapter Objectives
1. Describe financial instruments and its function.
2. Explain what financial assets, financial liabilities, and equity instruments are.
3. Describe derivatives and its purpose.
Financial Instruments
A financial instrument is a contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.
A contract is an agreement between two or more parties that has clear economic consequences
that the parties have little discretion to avoid as it is enforceable by law.
Financial Assets
Financial asset is any asset that is:
o Cash (cash in bank/ cash on hand)
petty cash
demand, savings, time deposits
undeposited checks
foreign currencies
money orders
bank drafts
o Equity instrument of another entity
Stock certificates
Publicly listed securities
o Derivative financial assets
Futures contract
Forward contract
Call options
Foreign currency futures
Interest rate swaps
o Receivable
Trade receivables
Promissory notes
Bond certificates
Financial Liabilities
Financial liabilities is any liability that is
o A contractual obligation
To deliver cash or another financial asset to another entity
To exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavorable to the entity
o A contract that will be settled in the entity’s own equity instruments and is:
A non-derivative for which the entity is or may be obligated to deliver a variable
number of the entity’s own equity instruments
Prepared by: Carmela Peduche
Reference: Cabrera, Ma. Elenita B. (2020) Financial Markets and Institutions, 2020 Edition. Manila
Polytechnic University of the Philippines – Alfonso Extension Campus
Financial Markets and Institutions
03 – Financial Instruments
A derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entity’s own
equity instruments.
Examples include
Accounts and notes payable
Derivative financial liabilities
Obligations to deliver shares for cash
Equity Instruments
Equity instruments are contracts that evidence a residual interest in the assets of the entity after
deducting all of its liabilities.
o Ordinary shares
o Preference shares
o Warrants or written call options
Derivative Financial Instruments
Derivatives are financial instruments that derive their value on contractually required cash flows
from some other security or index. Derivatives usually comprise:
o Designated future date
o Predetermined price
o Underlying asset
Examples of derivatives include:
o Futures contracts – an agreement between a buyer and seller that requires the seller to
deliver a particular commodity at a designated future date, at a predetermined price.
Financial futures contract – when the commodity is a financial instrument used
either as an investment or hedge against risks on future prices
o Forward contracts -
Prepared by: Carmela Peduche
Reference: Cabrera, Ma. Elenita B. (2020) Financial Markets and Institutions, 2020 Edition. Manila
