Question 98 from UPSC CSE 2024 - Economic s

Question

Consider the following:
1. Exchange-Traded Funds (ETF)
2. Motor vehicles
3. Currency swap
Which of the above is/are considered financial instruments?

IASCODEX · Accepted Answer

Correct Option: D. 1 and 3 only

Strategy: - Identify items representing ownership rights, claims, or agreements involving monetary value, distinguishing them from physical assets.
- Recognize Exchange-Traded Funds (ETFs) and currency swaps as financial instruments.
- Exclude motor vehicles, as they are tangible goods, not financial claims or contracts.
- Select the option that includes '1 and 3' while eliminating any option containing '2'.

Key Info: ## Financial Instruments
A financial instrument is a document or contract representing a legal agreement that involves a claim to payment or ownership. These can be classified as equity-based (e.g., stocks, exchange-traded funds), debt-based (e.g., bonds, T-bills), or derivatives (e.g., futures, swaps).

- **Exchange-Traded Funds (ETFs)**: Pooled investment securities traded on stock exchanges, combining elements of mutual funds and stocks. ETFs are widely used for passive investing, portfolio diversification, and liquidity.
- **Currency Swaps**: Derivative contracts where two parties agree to exchange principal and interest in different currencies. They are used primarily for hedging currency risk, managing debt obligations, or gaining access to foreign capital at favorable rates.
- **Motor Vehicles**: Tangible physical goods that do not represent a claim, contract, or ownership in a financial asset. Although their purchase can involve financial instruments like loans or leases, the vehicles themselves are not classified as such.

Therefore, ETFs and currency swaps are unambiguously financial instruments, while motor vehicles are not.

IASCODEX · Answer

Option A: 1 only

IASCODEX · Answer

Option B: 2 and 3 only

IASCODEX · Answer

Option C: 1, 2, and 3

Consider the following: Exchange-Traded Funds (ETF) Motor vehicles Currency swap Which of the above is/are considered financial instruments?

Consider the following:

Exchange-Traded Funds (ETF)

Motor vehicles

Currency swap
Which of the above is/are considered financial instruments?