A financial instrument reflects a claim on what is known as an underlying
Financial instruments can be direct claim
s on earnings - as in stocks (aka shares
outside the United States
) - which effectively reflect ownership
of the associated company
. In this case, the underlying
is the firm that issued the stocks.
They can also be claims on cash
flows. A fixed income instrument such as a bond
allows its owner
to receive cash flows at predetermined times during the life
of the instrument.
There are also a wide class of instruments known as contigent claims
s such as Options
fall into this category.
Contingent claims do not reflect definitive ownership of the underlyng instrument
; instead the owner may elect to take possession at their option.