What are financial instruments? To help individuals, entities, and businesses better understand the current financial instruments, KMC.vn will provide a detailed explanation of the characteristics of the most commonly used financial instruments below. This will assist businesses and individuals in selecting the appropriate financial instruments to create opportunities for risk management and speculation for profit generation.
What are financial instruments?
According to the International Financial Reporting Standards (IFRS), a financial instrument is a contract that results in one entity having a financial asset and another entity having a financial liability or an equity instrument.
In simpler terms, a financial instrument is any asset that an investor can trade, buy, or sell. Contracts that are valued and traded, such as securities, options, futures contracts, and promissory notes, are all classified as financial instruments.
Benefits of Financial Instruments
Financial instruments provide the following benefits:
- Help businesses prevent and mitigate risks in their operations.
- Help businesses navigate challenging periods and avoid the risk of bankruptcy.
- Provide opportunities for businesses to earn profits safely and without exposure to financial risks.
- Support businesses in investing and expanding operations into other potential markets.
Financial instruments help businesses raise, allocate, and manage capital efficiently. They also serve as tools for measuring, valuing, and analyzing financial risks, helping to reduce risks in business operations and facilitating collaboration between businesses and investors, integrating risk management, speculation, and profit generation activities.
Basic Financial Instruments
You have understood what financial instruments are, as well as their roles and benefits. To gain a deeper understanding, KMC will help you explore the basic financial instruments currently available!
In Vietnam, financial instruments include various types and are generally classified into two main categories as follows:
By Cash Instruments and Derivatives:
- Cash Instruments: Cash, checks, promissory notes, bills of exchange. The value of these financial instruments is directly influenced and determined by fluctuations in the money market.
- Non-Cash Instruments: Stocks, bonds, mutual fund certificates, futures contracts, swap agreements, and options.
- Derivatives: The value and characteristics of these instruments are based on the underlying components of the investment, such as assets, interest rates, or indices.
- Foreign Exchange Instruments: Instruments used in international markets, including currency agreements and derivative instruments.
By Asset Type:
- Debt Instruments: Government bonds, corporate bonds, treasury bills, time deposits, certificates of deposit, short-term interest rates, forward exchange agreements, and futures contracts on bonds.
- Equity Instruments: Stocks, mutual fund certificates, stock options, equity futures contracts, stock options, and warrants.
- Derivative Instruments: Futures contracts, swap agreements, and options.
Considerations for Choosing the Right Financial Instruments
To choose the right financial instruments, businesses should consider the following factors:
Understand Financial Instruments
First, you need to have a clear understanding of the financial instruments your business currently holds or intends to develop and expand. Understanding the nature of these financial instruments, how they work, and the characteristics of each is the only way for a business to increase its income and create additional revenue streams.
Identify the Financial Instruments Required
Determine which financial instruments will help you achieve your financial goals, whether they are short-term, long-term, or for long-term accumulation.
Assess the Risk Profile
Each financial instrument carries its own set of risks, with varying levels of risk. Therefore, businesses need to evaluate the risk level and their risk tolerance to make the most optimal decision.
Analyze and Choose
Finally, you should thoroughly analyze the pros and cons of each financial instrument before making any decision. Consider all factors related to your objectives, risk tolerance, investment horizon, and ensure a clear understanding of how each instrument works before making your final choice.
Above, KMC has explained what financial instruments are and offered key considerations for choosing the right ones. If you have any further questions or need more in-depth advice on financial instruments, feel free to contact KMC, where our professional financial experts are ready to assist and support you.
