3.2 Financial InstrumentsO2. Functions:Serve as a:Means of payment (Like Money)Store of Value (Like Money)allow for the trading of risk3-6
3-6 3.2 Financial Instruments 2. Functions: Serve as a: Means of payment (Like Money) Store of Value (Like Money) allow for the trading of risk
FinancialInstrumentsO3. CharacteristicsStandardizationCommunicate Information4.Classes of Financial InstrumentsPrimary-underlyingInstrumentsDerivative InstrumentsValue derived from the behavior of Underlying instruments3-7
3-7 Financial Instruments 3. Characteristics • Standardization • Communicate Information 4. Classes of Financial Instruments • Primary – underlying Instruments • Derivative Instruments • Value derived from the behavior of Underlying instruments
Financial Instrumentsa5.Value of Financial Instruments(1). Size the promised payment.(2). When the payment will be received.(3).The likelihood the payment will bemade (risk).(4).The conditions under which thepaymentwill be made3-8
3-8 Financial Instruments 5.Value of Financial Instruments (1). Size the promised payment. (2). When the payment will be received. (3). The likelihood the payment will be made (risk). (4). The conditions under which the payment will be made
Financial Instrumentsa6. Examples of Financial InstrumentsPrimarilyStoresofValueBankLoansBondsHomeMortgagesStocksAsset-backed securities3-9
3-9 Financial Instruments 6. Examples of Financial Instruments Primarily Stores of Value • Bank Loans • Bonds • Home Mortgages • Stocks • Asset-backed securities
Financial InstrumentsdExamples :Primarily to transfer riskInsuranceFutures ContractsOptions3-10
3-10 Financial Instruments Examples : Primarily to transfer risk • Insurance • Futures Contracts • Options