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

(a) 1 only
(b) 2 and 3 only
(c) 1, 2 and 3
(d) 1 and 3 only ✓ UPSC's answer

Why the answer is (d)

• A financial instrument is a contract that creates a financial asset for one party and a financial liability or equity for another — shares, bonds, derivatives, deposits.

• An Exchange-Traded Fund is a security representing units of a fund that tracks an index or asset and trades on a stock exchange — item 1 is a financial instrument.

• A currency swap is a derivative contract to exchange principal and interest in two currencies — item 3 is a financial instrument.

• A motor vehicle is a physical (real) asset; it can be financed or insured, but it is not itself a financial instrument — item 2 does not qualify.

• Hence 1 and 3 only, option (d).

Why the other options are wrong

(a) 1 only: Currency swaps are also financial instruments.
(b) 2 and 3 only: A motor vehicle is a physical asset, not a financial instrument.
(c) 1, 2 and 3: A motor vehicle is not a financial instrument.

Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2024, held on 16 June 2024. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.