UPSC Prelims 2024 Question:

Consider the following

1. Exchange-Traded Funds (ETF)
2. Motor vehicles X
3. Currency swap
   
   

Which of the above is/are considered financial instruments?

Explanation: 

Financial instruments are contracts that represent a financial asset, liability, or ownership stake. They facilitate the flow of money between investors and borrowers and can be used for various purposes like investment, risk management, and speculation.

• Exchange-Traded Funds (ETFs): These are investment funds that track a basket of securities like stocks, bonds, or commodities. They trade on stock exchanges like individual shares, and investors can buy or sell units of the ETF.  So, point 1 is correct.
  
  
• Motor Vehicles: Cars, trucks, and other motor vehicles are not financial instruments. They are considered physical assets and while you can buy and sell them, they don't represent a financial obligation or contract.  So, point 2 is not correct.
  
  
• Currency Swap: This is a financial agreement between two parties to exchange cash flows denominated in different currencies. It allows for managing foreign exchange risk or speculating on currency movements. So, point 3 is correct.
  
  

Therefore, option (4) is the correct answer.

Subject: Economics | Financial Sectors and Capital Market