Assertion: A financial market is a market for the creation and exchange of financial assets.

Reasoning: Financial markets play an important role in the allocation of scarce resources in an economy.

Both Assertion (A) and reasoning (R) are correct and but R is not the correct explanation of A.

The correct answer is option 2: Both Assertion (A) and reasoning (R) are correct and but R is not the correct explanation of A.

Assertion (A):

• A financial market is a market for the creation and exchange of financial assets.
  This is a factual definition of a financial market.

Reasoning (R):

• Financial markets play an important role in the allocation of scarce resources in an economy.
  This statement is correct and highlights the role of financial markets in resource allocation.

Does R explain A?

• No, R does not explain A.
  The assertion is a definitional statement about the nature of a financial market (what it is), while the reasoning highlights a significant function of financial markets (what they do). While both statements are correct, the reasoning does not directly explain the assertion; it instead elaborates on a different aspect of financial markets.