Consider the following:

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

Correct Answer: (d) 1 and 3 only

Explanation:

Option 1: Exchange-Traded Funds (ETF)
- ETFs are considered financial instruments because they are investment funds that hold a collection of assets such as stocks, bonds, or commodities and are traded on stock exchanges. They provide diversification and can be bought and sold like stocks .
Option 2: Motor vehicles
- Motor vehicles are not considered financial instruments. They are tangible assets that depreciate over time and do not represent a financial agreement or monetary value in the context of financial markets.
Option 3: Currency swap
- Currency swaps are considered financial instruments. They are derivatives used by banks, multinational corporations, and institutional investors to exchange principal and interest payments in different currencies, helping to manage foreign exchange risk and borrowing costs .

Definition: An ETF is a type of investment fund that holds a collection of assets such as stocks, bonds, or commodities and is traded on stock exchanges.
Types: Equity ETFs, Bond ETFs, Commodity ETFs, Sectoral/Thematic ETFs, International ETFs.
Advantages: Diversification, lower fees, ease of trading, transparency.
Disadvantages: Market risk, trading costs, potential tracking errors.
Market Size: In the US, $5.4 trillion in equity ETFs and $1.4 trillion in fixed-income ETFs.

Definition: Tangible assets that depreciate over time.
Accounting: Considered depreciating assets, not financial instruments.
Value: Depreciates due to factors like usage, design, repair costs, and market conditions.

Definition: A financial instrument where two parties exchange principal and interest payments in different currencies.
Purpose: To manage foreign exchange risk and reduce borrowing costs.
Types: Floating vs. Floating, Fixed vs. Floating, Fixed vs. Fixed, Non-deliverable swaps.
Advantages: Lower borrowing costs, hedging against exchange rate fluctuations, customized terms.
Usage: Widely used by banks, multinational corporations, and institutional investors .