Financial Markets & Products

FRM® Part I, published weight 30%. Institutions, market structure, futures, swaps, options, rates, FX, MBS.

What the outline covers

Financial institutions and their risks: banks, insurers, pension funds, mutual and hedge funds
Economic vs regulatory capital; insurance company ratios
Exchange-traded and OTC market structure, central counterparties
Forwards and futures: mechanics, margin, hedge ratios, basis risk
Swaps: cash flows and valuation
Options: mechanics and payoffs
Interest rates and interest-rate products
Foreign exchange risk
Corporate bonds; mortgages and mortgage-backed securities
Commodity forwards and futures

Sample questions

These 5 questions are free in the app too. Try each one before opening the answer.

Question 1

The standard deviation of spot price changes is 0.65, the standard deviation of futures price changes is 0.81, and their correlation is 0.80. The minimum variance hedge ratio is closest to:

σ_S 0.65 · σ_F 0.81 · ρ 0.80

A. 0.64
B. 0.80
C. 0.99
D. 1.25

Show the answer

A. h* = ρ × (σ_S/σ_F) = 0.80 × (0.65/0.81) = 0.80 × 0.8025 = 0.642.

Reading: Financial Markets and Products — Hedging with Futures

Question 2

Initial margin posted to a central counterparty is intended to cover:

A. Current mark-to-market exposure
B. Potential future exposure over the close-out period
C. The clearing member’s default fund contribution
D. Accrued interest on the position

Show the answer

B. Initial margin covers potential future exposure between default and close-out. Variation margin settles current mark-to-market.

Reading: Financial Markets and Products — Central Counterparties

Question 3

An investor buys a call with a strike of $40 for a premium of $3. The breakeven price at expiry is:

X = $40 · premium $3

A. $37
B. $40
C. $43
D. $46

Show the answer

C. Breakeven = strike + premium = 40 + 3 = $43. Below that the option either expires worthless or recovers less than the premium paid.

Reading: Financial Markets and Products — Options Mechanics and Payoffs

Question 4

A hedger uses a futures contract on a related but different asset. The residual exposure is best described as:

A. Counterparty risk
B. Basis risk
C. Liquidity risk
D. Operational risk

Show the answer

B. Cross-hedging leaves basis risk — the risk that the spot and futures prices do not move together.

Reading: Financial Markets and Products — Forwards and Futures

Question 5

On a reset date, the value of the floating leg of a plain vanilla interest rate swap is:

A. Zero
B. Par
C. The notional plus accrued interest for the full remaining term
D. Indeterminate without the forward curve

Show the answer

B. A floating-rate note reprices to par on each reset date. That single fact collapses most swap valuation questions.

Reading: Financial Markets and Products — Swaps

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