Financial Instrument

A financial instrument is a debt or equity instrument where one counterparty (the lender or shareholder) has a financial asset and the other either has a financial liability (i.e. an obligation to repay) or in the case of an equity instrument, an accounting entry as shareholders’ equity on the balance sheet. When they are activated, financial instruments are contracts between counterparties. Derivatives are financial instruments whose value fluctuates based on movements in the underlyings, time and other factors.