Accounting for corporate finance: derivative contracts: what is a derivative financial instrument?
What is a derivative financial instrument?
FRS13 defines a derivative financial instrument as ‘a financial instrument that derives its value from the price or rate of some underlying item’, where:
- underlying items are defined to include equities, bonds, commodities (i.e. those which are in practice cash settled), interest rates, exchange rates and stock market or other indices.
Derivative financial instruments include futures, options, forward contracts, interest rate and currency swaps, interest rate caps, collar and floors, forward interest rate agreements, commitments to purchase shares or bonds, note issuance facilities and letters of credit.