UPSC Prelims 2024 Q44: Indian Economy – Financial Markets & Capital Markets
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
Answer: (d) 1 and 3 only
Explanation
What is a financial instrument?
A financial instrument is a contract that creates a financial asset for one party and a financial liability or equity for another (as in Ind AS 32).
| Item | Financial instrument? | Reason |
|---|---|---|
| 1. Exchange-Traded Funds (ETFs) | Yes | Units of a fund traded on stock exchanges — an equity-type financial asset |
| 2. Motor vehicles | No | A physical (real) asset; it is not a contract for cash or other financial assets |
| 3. Currency swap | Yes | A derivative contract to exchange currencies |
Types of financial instruments:
| Type | Examples |
|---|---|
| Equity | Shares, ETFs, mutual fund units |
| Debt | Bonds, debentures, loans |
| Derivatives | Futures, options, swaps |
Answer: (d) 1 and 3 only.
Why each option is right or wrong
- (a) Incorrect. It leaves out the currency swap, which is a derivative financial instrument.
- (b) Incorrect. Motor vehicles are physical assets, not financial instruments.
- (c) Incorrect. A motor vehicle is not a financial instrument, so 'all three' fails.
- (d) CORRECT. ETFs and currency swaps are financial contracts; motor vehicles are real assets.
Key point
Financial instruments are contracts (shares, ETFs, bonds, derivatives like swaps); vehicles and land are real assets.
Remember
ETFs and currency swaps are financial instruments; motor vehicles are not.
Common mistakes
- Counting a car loan as the car itself; the loan is a financial instrument, the vehicle is not.
- Thinking a swap is too complex to be an instrument; it is a standard derivative.
- Forgetting that ETFs trade like shares and are financial assets.
Exam tip
Ask: is it a contract for money? If you can touch and drive it, it is a real asset, not a financial one.
Sources
- Ind AS 32 — Financial Instruments: Presentation (ICAI)
- SEBI — Investor education on ETFs and derivatives