A financial instrument is a monetary contract that can be created, traded, or modified. An example of such an
instrument from everyday life is a check, because it functions in the same way, as a promise to pay, in lieu of
using dollar bills directly. Similarly,
stocks
and
options
are evidence of ownership. Additionally,
bonds
are contractual rights to receive cash at a later date. Simply put, a financial instrument is representative of
another asset or capital that is exchangeable or tradeable. It allows for one entity to create an asset and the
counterparty entity to create a liability. In accounting terms, this encompasses, cash, deposits, loans,
trade receivables, loans, and investments in debt, shares, and equity.