Question map
Not attempted Correct Incorrect ★ Bookmarked
Loading…
Q44 (IAS/2024) Economy › Money, Banking & Inflation › Financial markets overview Official Key

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

Result
Your answer: —  ·  Correct: D
Explanation

A financial instrument is a real or virtual document representing a legal agreement that involves any kind of monetary value.[1] Let's analyze each option:

**Exchange-Traded Funds (ETF):** ETFs are similar to Mutual Funds as they involve a basket of securities and are bought and sold on stock exchanges[2], and may contain investments such as shares, debentures, bonds or even commodities.[2] Being tradable securities with monetary value, ETFs are financial instruments.

**Motor vehicles:** Commodities such as precious metals, energy products, raw materials, and agricultural products are traded on global markets, but they do not typically meet the definition of a financial instrument because they do not confer a claim or obligation.[3] Similarly, motor vehicles are physical assets, not financial instruments representing legal agreements of monetary value.

**Currency swaps:** Swaps are derivatives used to manage risks, and represent a contract between[4] two parties for exchange of pre-agreed cash flows of two different financial instruments.[4] A bilateral currency swap is a transaction in which two parties exchange an equivalent amount of money with each other but in different currencies.[5] Currency swaps are clearly financial instruments as they represent contractual agreements with monetary value.

Therefore, only **ETFs (1) and Currency swaps (3)** are financial instruments, making option D correct.

Sources
  1. [1] https://www.investopedia.com/terms/f/financialinstrument.asp
  2. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Exchange Traded Fund (ETF) > p. 271
  3. [3] https://www.investopedia.com/terms/f/financialinstrument.asp
  4. [4] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Swaps > p. 271
  5. [5] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > CURRENCY SWAP > p. 501
How others answered
Each bar shows the % of students who chose that option. Green bar = correct answer, blue outline = your choice.
Community Performance
Out of everyone who attempted this question.
56%
got it right
PROVENANCE & STUDY PATTERN
Full view
Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. Consider the following : 1. Exchange-Traded Funds (ETF) 2. Motor vehicles 3. Currency swap Which of the above is/are considered finan…
At a glance
Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 6.7/10 · 3.3/10

This is a fundamental concept check: distinguishing 'Financial Assets' (claims/contracts) from 'Real Assets' (physical goods). While ETFs and Swaps are standard textbook topics, 'Motor vehicles' acts as a logic trap. Trust the basic definition: if it's a consumer good you drive, it's not a financial instrument.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Are Exchange-Traded Funds (ETFs) considered financial instruments?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > FINANCIAL MARKET > p. 257
Presence: 5/5
“Money Market Terms Relating to Money Market Common Money Market Instruments Capital Market Primary Market vs Secondary Market Financial Instruments in Capital Market Shares Debentures Bonds Some Major Bonds in India Sovereign Gold Bond Scheme Mutual Funds Derivatives Real Estate Investment Trust (REIT) Exchange Traded Fund (ETF)”
Why this source?
  • ETF is explicitly listed under 'Financial Instruments in Capital Market' alongside shares, debentures and bonds.
  • Placement in that list treats ETFs as a category of capital-market instruments.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Exchange Traded Fund (ETF) > p. 271
Presence: 5/5
“• ETF is similar to Mutual Fund as it also involves a basket of securities except that ETFs are bought and sold throughout the day on stock exchanges while mutual funds are bought and sold based on their price at day's end. • ETF share price fluctuates throughout the day. • An ETF may contain all types of investments such as shares, debentures, bonds or even commodities. • ETFs offer low expense ratio and less broker commissions as compared to individually buying stocks.”
Why this source?
  • Describes ETFs as baskets of securities similar to mutual funds, implying they are investable financial products.
  • States an ETF may contain shares, debentures, bonds or commodities, showing ETF is composed of financial instruments.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Indian Economy 8.16 > p. 272
Presence: 4/5
“• Examples of ETFs include Bond ETFs, Industry ETFs, Commodity ETFs, Currency ETFs, Gold ETFs, etc. • Government of India presently has two ETFs: CPSE ETF and Bharat-22 ETF. CPSE-ETF comprises shares of 11 Central Public Sector Enterprises. Bharat-22 ETF covers shares of 16 CPSEs, 03 Public Sector Banks and 03 Private Sector Companies. A new Debt ETF was also announced in the Budget 2020-21. • Mutual Fund (MF): MFs can be purchased only at the end of each trading day.; Exchange Traded Fund (ETF): ETFs can be traded like stocks throughout the day. • Mutual Fund (MF): investment is based on a calculated price.; Exchange Traded Fund (ETF): on stock exchanges. • Mutual Fund (MF): MFs typically come with a higher minimum investment requirement than ETFs.; Exchange Traded Fund (ETF): as compared to MFs.”
Why this source?
  • Provides concrete examples and named government ETFs (CPSE, Bharat-22), indicating ETFs function as marketable financial products.
  • Contrasts ETF trading (throughout the day like stocks) with mutual fund mechanics, highlighting their role in financial markets.
Statement 2
Are motor vehicles considered financial instruments?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"Definition A financial instrument is a real or virtual legal agreement of monetary value which can be traded or exchanged, and may be an asset such as stocks, bonds, derivatives, and loans."
Why this source?
  • Defines a financial instrument as a "real or virtual legal agreement of monetary value which can be traded or exchanged," emphasizing contractual/transferable nature.
  • Lists typical examples (stocks, bonds, derivatives, loans) — categories that are contractual or claim-based rather than physical consumer goods.
Web source
Presence: 5/5
"* A financial instrument is a real or virtual document representing a legal agreement that involves any kind of monetary value."
Why this source?
  • States that a financial instrument is a document representing a legal agreement involving monetary value.
  • Notes financial instruments convey rights to deliver or receive cash or another financial instrument, highlighting that the core is a legal/financial right.
Web source
Presence: 4/5
"Commodities such as precious metals, energy products, raw materials, and agricultural products are traded on global markets, but they do not typically meet the definition of a financial instrument. That’s because they do not confer a claim or obligation."
Why this source?
  • Explains that physical commodities, though traded, "do not typically meet the definition of a financial instrument" because they do not confer a claim or obligation.
  • Supports the distinction between traded physical goods and instruments that create financial claims or obligations.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.7 Financial Markets > p. 50
Strength: 5/5
“Money Market: A segment of the financial market in which financial instruments with high liquidity and very short maturities (less than one year) are traded. Money market instruments are basically debt instruments and include Call/Notice money, Repos, Treasury Bills, Cash Management Bills, Commercial Paper, Certificate of Deposits and Collateralized Borrowing and Lending Obligations (CBLO). The players who can trade in the money market are financial institutions, commercial banks, central banks and highly rated corporates. These markets are less risky. Money Market transactions can also be classified as primary and secondary. • Call/Notice Money: In call money, funds are transacted for overnight basis and under notice money; funds are transacted for the period between 2 days and 14”
Why relevant

Defines 'money market instruments' as tradable debt instruments (e.g., T-bills, CP, CDs) indicating financial instruments are negotiable claims, not physical goods.

How to extend

A student could compare this definition to the nature of a motor vehicle (a physical good/asset) to judge whether it fits the negotiable-debt/claim criterion.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.7 Financial Markets > p. 51
Strength: 4/5
“days. These are unsecured instruments. Participants include Commercial and Cooperative Banks, Primary Dealers (PDs), development finance institutions, insurance companies and select mutual funds. • Certificate of Deposits (CD): CDs are negotiable/tradable, unsecured money market instruments issued mostly by Scheduled Commercial Banks for a maturity period up to one year against funds deposited at the bank.• Commercial Paper (CP): CP is an unsecured money market instrument issued in the form of a promissory note (promise to pay in future). The maturity of a CP shall be between seven days to one year. NBFCs, development financial institutions (like NABARD, SIDBI etc.), cooperative societies, Govt. entities (PSUs) and other companies can issue CP to raise money in the money market.”
Why relevant

Lists specific money-market instruments (Certificate of Deposit, Commercial Paper) as examples of financial instruments, illustrating typical forms such instruments take.

How to extend

Using these examples, a student can contrast the legal/formal characteristics (issuer, negotiability, maturity) with those of vehicles to test membership.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > FINANCIAL MARKET > p. 257
Strength: 4/5
“Money Market Terms Relating to Money Market Common Money Market Instruments Capital Market Primary Market vs Secondary Market Financial Instruments in Capital Market Shares Debentures Bonds Some Major Bonds in India Sovereign Gold Bond Scheme Mutual Funds Derivatives Real Estate Investment Trust (REIT) Exchange Traded Fund (ETF)”
Why relevant

Provides categories of 'financial instruments in capital market' (shares, bonds, derivatives, REITs, ETFs), showing common asset classes considered financial instruments.

How to extend

A student can use this taxonomy to see that motor vehicles are not listed among capital-market financial assets and therefore likely not classified as such.

Science-Class VII . NCERT(Revised ed 2025) > Chapter 8: Measurement of Time and Motion > SCIENCE AND SOCIETY > p. 116
Strength: 3/5
“Vehicles such as scooters, motorbikes, cars, and buses have an instrument which measures and displays the vehicle's speed in km/h. It is called a speedometer. Another instrument, known as an odometer, is also fi tted in the vehicles that measures the distance travelled by the vehicle in kilometre. I once watched a part of marathon on a straight road stretch. I noticed that some people seemed to be running at the same speed during that distance while some people would speed up or slow down. How were their motion diff erent?”
Why relevant

Uses the word 'instrument' in a physical sense (speedometer, odometer) for vehicles, highlighting that 'instrument' has non-financial meanings and potential for ambiguity.

How to extend

A student could note the polysemy and ensure the financial sense (tradable claim) is intended before equating 'vehicle' with 'instrument.'

Geography of India ,Majid Husain, (McGrawHill 9th ed.) > Chapter 11: Industries > Defence Vehicles > p. 48
Strength: 3/5
“Fig. 11.13 Production, Sales and Exports of Automobiles (million units) [Source: CMIE; Care Ratings Industry research, Automobile Update-Outlook FY 19] The financial year 2018 was an eventful year for the automobile industry . The following were the key features: • (i) Demonetization was announced in 2016.• (ii) Supreme court's BS-III vehicle ban became effective from April 1, 2017.• (iii) Goods and Service Tax was implemented from July1, 2018.• (iv) Continued ban on diesel cars by National Green Tribunal (NGT), September 2018.• (v) Cess increase in September 2017. Automobile industry was delicensed in July 1991 with the announcement of New Industrial Policy.”
Why relevant

Discusses automobiles as an industry product (production, sales, regulation), framing vehicles as consumer/industrial goods subject to taxes and bans rather than financial instruments.

How to extend

A student can infer that because vehicles are regulated and traded as goods with production statistics, they function primarily as physical commodities rather than standard financial instruments.

Statement 3
Are currency swaps considered financial instruments?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Swaps > p. 271
Presence: 5/5
“Swaps are derivatives which are used to manage risks of various kinds. These are generally used to manage interest rate risk and currency risk. It is a contract between two parties for exchange of pre-agreed cash flows of two different financial instruments. The cash flows are usually determined using the notional principal amount (loan or bond).”
Why this source?
  • Explicitly classifies swaps as derivatives — a class of financial instruments.
  • Describes swaps as contracts to exchange pre‑agreed cash flows tied to financial instruments.
  • Specifies swaps manage interest‑rate and currency risk, a financial risk management function.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 17: India’s Foreign Exchange and Foreign Trade > CURRENCY SWAP > p. 501
Presence: 4/5
“A bilateral currency swap is a transaction in which two parties exchange an equivalent amount of money with each other but in different currencies. The parties are essentially loaning each other money and will repay the amounts at a specified date and exchange rate. The purpose could be to hedge exposure to exchange-rate risk, to speculate on the direction of a currency or to reduce the cost of borrowing in a foreign currency. Example: In 2020, RBI signed a Currency Swap Agreement with the Central Bank of Sri Lanka under the SAARC Currency Swap Framework 2019-22 and a Currency Swap Agreement between India and Japan in 2018.”
Why this source?
  • Defines a bilateral currency swap as an exchange of equivalent amounts in different currencies between two parties.
  • Frames the transaction as parties effectively loaning each other money and repaying under specified terms — a financial arrangement.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Currency Swap Agreement between two companies: > p. 101
Presence: 4/5
“At the start of the swap, the equivalent principal amounts are exchanged at the prevailing rate.• At the end of the swap period, the principal amounts are swapped back at either the prevailing rate or at a pre-agreed rate such as the rate of the original exchange of principle amount.• Currency swaps are used to obtain foreign currency loans at a better interest rate or as a method of hedging exchange rate risks on foreign currency loans.”
Why this source?
  • Describes the mechanics of currency swaps: exchange of principal at start and reversal at end at prevailing or pre‑agreed rates.
  • States practical uses: obtaining foreign currency loans at better rates and hedging exchange‑rate risk, highlighting their financial‑instrument role.
Pattern takeaway: UPSC is blending 'High Finance' terms with 'Daily Life' objects to test definitional precision. The pattern is to insert one obvious physical object into a list of intangible assets to test if you know that 'Financial Instruments' are strictly contracts, not tools.
How you should have studied
  1. [THE VERDICT]: Sitter. Statements 1 and 3 are direct hits from standard sources (Singhania Ch 9/Vivek Singh Ch 2). Statement 2 is a common-sense elimination.
  2. [THE CONCEPTUAL TRIGGER]: Financial System > Classification of Assets. The core distinction between Financial Markets (trading claims) and Product Markets (trading goods).
  3. [THE HORIZONTAL EXPANSION]: Memorize the 'Paper vs. Physical' list. Financial: T-Bills, Commercial Paper, CDs, REITs, InvITs, Masala Bonds, Derivatives (Futures/Options). Physical/Real: Land, Buildings, Gold Bullion, Vehicles, Machinery. Note: Sovereign Gold Bonds = Financial; Gold Coin = Physical.
  4. [THE STRATEGIC METACOGNITION]: Don't just memorize lists; understand the 'Why'. A financial instrument represents a legal claim to future cash flows or equity. A motor vehicle represents utility/consumption. Apply this 'Claim vs. Consumption' test to any new term.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 ETF vs Mutual Fund: intraday trading vs end-of-day NAV
💡 The insight

ETFs trade on exchanges throughout the day like stocks, whereas mutual funds transact at a calculated end-of-day price.

High-yield: clarifies market microstructure and liquidity differences important for policy and investor-impact questions; connects to stock exchange operations and retail investor behaviour. Mastery helps answer comparative questions on investment vehicles and regulatory implications.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Exchange Traded Fund (ETF) > p. 271
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Indian Economy 8.16 > p. 272
🔗 Anchor: "Are Exchange-Traded Funds (ETFs) considered financial instruments?"
📌 Adjacent topic to master
S1
👉 ETF composition & types (equity, debt, commodity, sectoral, government ETFs)
💡 The insight

ETFs can hold shares, debentures, bonds or commodities and exist in specific forms like Bond ETFs, Commodity ETFs and government CPSE/Bharat-22 ETFs.

High-yield: useful for interpreting budgetary instruments (e.g., debt ETFs), disinvestment strategies and portfolio implications; links to public finance, capital-market instruments and fiscal policy questions.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Exchange Traded Fund (ETF) > p. 271
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Indian Economy 8.16 > p. 272
🔗 Anchor: "Are Exchange-Traded Funds (ETFs) considered financial instruments?"
📌 Adjacent topic to master
S1
👉 Classification of financial instruments in capital markets
💡 The insight

ETFs are listed alongside shares, debentures, bonds, mutual funds, derivatives and REITs as capital-market instruments.

High-yield: aids structured answers on market architecture, regulatory categories and instrument-specific roles in mobilisation of savings; connects to money vs capital market distinctions and public finance topics.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > FINANCIAL MARKET > p. 257
🔗 Anchor: "Are Exchange-Traded Funds (ETFs) considered financial instruments?"
📌 Adjacent topic to master
S2
👉 What qualifies as a financial instrument
💡 The insight

Financial instruments are defined as tradable financial assets such as shares, debentures, bonds, sovereign gold bonds, mutual funds, derivatives, REITs and ETFs, not physical goods.

High-yield for UPSC economy and public finance topics: knowing the canonical list of financial instruments helps classify government borrowing, household savings and market instruments. It connects to questions on capital markets, fiscal operations and financial sector regulation and enables elimination of wrong options that confuse physical assets with financial securities.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > FINANCIAL MARKET > p. 257
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Government Budgeting > p. 189
🔗 Anchor: "Are motor vehicles considered financial instruments?"
📌 Adjacent topic to master
S2
👉 Money-market vs capital-market instruments
💡 The insight

Short-term debt instruments (e.g., CDs, commercial paper, treasury bills, repos) are specific categories of financial instruments with definitional criteria like maturity and liquidity.

Important for questions on banking, liquidity management and market segmentation; mastering distinctions between money-market and capital-market instruments helps answer questions about market functioning, risk profiles and participants.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.7 Financial Markets > p. 50
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.7 Financial Markets > p. 51
🔗 Anchor: "Are motor vehicles considered financial instruments?"
📌 Adjacent topic to master
S2
👉 Non-financial meaning of 'instrument' (physical device)
💡 The insight

The word 'instrument' can mean a physical measuring device (speedometer, odometer) in vehicles, which is conceptually distinct from a financial instrument.

Useful to avoid category errors when interpreting questions that use 'instrument' ambiguously; helps in legal and technical reading comprehension across polity, economy and science-related questions.

📚 Reading List :
  • Science-Class VII . NCERT(Revised ed 2025) > Chapter 8: Measurement of Time and Motion > SCIENCE AND SOCIETY > p. 116
🔗 Anchor: "Are motor vehicles considered financial instruments?"
📌 Adjacent topic to master
S3
👉 Swaps as derivatives
💡 The insight

Swaps are a form of derivative contract used to exchange cash flows and manage financial risks.

High‑yield for banking and finance questions: explains classification of derivatives within financial instruments and links to risk management, market instruments, and regulatory treatment. Mastering this helps answer questions on financial instruments, derivatives markets, and risk mitigation strategies.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 9: Agriculture > Swaps > p. 271
🔗 Anchor: "Are currency swaps considered financial instruments?"
🌑 The Hidden Trap

REITs (Real Estate Investment Trusts) vs Real Estate. Since they tested Vehicles (Physical) vs ETFs (Financial), the next logical sibling is REITs. A REIT is a financial instrument; a house is a real asset. Also, watch out for 'Participatory Notes' (P-Notes)—an offshore derivative instrument often in the news.

⚡ Elimination Cheat Code

The 'Tangibility Test'. Ask yourself: 'Can I physically touch and use this item for non-financial utility?' A motor vehicle is for transport (utility). A currency swap is a contract (financial). If it has wheels, it's not a financial instrument. Eliminate (2).

🔗 Mains Connection

Mains GS-3 (Investment Models): The shift from 'Physical Savings' (Gold, Land, Vehicles) to 'Financial Savings' (ETFs, Bonds) is crucial for India's capital formation. This question subtly touches on the 'Financialization of the Economy' theme.

✓ Thank you! We'll review this.

SIMILAR QUESTIONS

CDS-I · 2018 · Q51 Relevance score: -0.99

Which one of the following statements about Exchange-Traded Fund (ETF) is not correct?

IAS · 2021 · Q37 Relevance score: -2.30

Consider the following: 1. Foreign currency convertible bonds 2. Foreign institutional investment with certain conditions 3. Global depository receipts 4. Non-resident external deposits Which of the above can be included in Foreign Direct Investments?

IAS · 2005 · Q128 Relevance score: -3.11

Consider the following : 1. Disputes with mobile cellular companies. 2. Motor accident cases 3. Pension cases For which of the above are Lok Adalats held?

IAS · 2012 · Q80 Relevance score: -3.30

Consider the following : 1. Hotels and restaurants 2. Motor transport undertakings 3. Newspaper establishments 4. Private medical institutions The employees of which of the above can have the ‘Social Security’ coverage under Employees’ State Insurance Scheme?

IAS · 2025 · Q41 Relevance score: -3.49

Consider the following types of vehicles: 1. Full battery electric vehicles 2. Hydrogen fuel cell vehicles 3. Fuel cell-electric hybrid vehicles How many of the above are considered as alternative powertrain vehicles?