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

1. A. 1 only
2. B. 2 and 3 only
3. C. 1, 2 and 3
4. D. 1 and 3 only

Answer: D

Explanation

A financial instrument is a monetary contract between parties, representing a financial asset for one party and a financial liability or equity instrument for another. 1. Exchange-Traded Funds (ETFs): These are investment funds traded on stock exchanges, representing a basket of underlying assets. They are considered financial instruments (specifically, securities). 2. Motor vehicles: These are tangible physical assets, not financial instruments. While they can be financed through loans (which are financial instruments), the vehicle itself does not represent a financial claim or contractual right to receive or deliver cash. 3. Currency swap: This is a derivative contract where two parties exchange principal and/or interest payments in different currencies. It is a type of financial instrument used for managing foreign exchange risk or obtaining financing in a foreign currency. Therefore, only Exchange-Traded Funds and Currency swaps are considered financial instruments. This question tests fundamental concepts of financial markets and instruments, which are important for the Economy section of UPSC.