The Financial Markets and Products section is not hard because the products are complex. It is hard because the exam tests your judgment on their risk, not just your memory of their definitions. Knowing what a call option is gets you zero points; calculating its delta and explaining how it affects a portfolio's risk profile earns you a pass.
Quick answer
These 10 free FRM Part I practice questions diagnose your readiness for the Financial Markets and Products (FMP) domain. They cover derivatives, fixed income, and clearing mechanisms, mirroring the 2026 exam's focus on computation and risk application, not just rote memorization.
Key facts
- Exam Domain
- Financial Markets and Products
- Part I Weighting
- 30% (30 questions)
- Official Body
- Global Association of Risk Professionals (GARP)
- Core Topics
- Derivatives (futures, forwards, options, swaps), fixed income, foreign exchange, equity markets, and central clearing.
- FRM Part I Pass Rate
- The May 2024 pass rate for the FRM Part I exam was 46% (GARP).
- Study Hours
- 200-250 hours for the entire Part I exam
What Do These Free FRM Questions Cover?
These questions, crafted by FRM charterholders for the 2026 curriculum, are your first diagnostic. They are designed to expose the gaps between what you have read and what you can actually apply under pressure.
The questions cover a mix of conceptual understanding and direct calculation, just like the real exam. You will find questions on:
- Forward Contract Valuation
- Futures vs. Forwards
- Option Spread Strategies
- Option Greeks (Theta)
- Interest Rate Swaps
- Central Counterparties (CCPs)
- Bond Price-Yield Relationship
- Put-Call Parity
- Bond Convexity
- OTC vs. Exchange-Traded Markets
Each explanation is structured to teach you the examiner’s mindset. We do not just show you the right answer. We show you why the tempting wrong answers are there and what cognitive trap they are designed to catch. This is your first step to moving beyond memorization. If you're just starting, you can try VoraPrep's free FRM practice questions for all sections to get a broader baseline.
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Financial Markets and Products Practice Questions
Answer the following 10 questions. Track your answers, then review the detailed explanations below.
Question 1:
A risk manager holds a long position in a 6-month forward contract on a non-dividend-paying stock. The stock price is currently $100, and the risk-free rate is 4% per annum (continuously compounded). Three months into the contract, the stock price has risen to $110. What is the value of the forward contract to the long position at this point?A. $7.92
B. $8.99
C. $10.00
D. $12.02
Question 2:
Which of the following statements most accurately compares futures contracts to forward contracts?A. Futures contracts are more customizable than forward contracts.
B. Futures contracts have higher counterparty risk due to daily settlement.
C. Forward contracts are marked-to-market daily, while futures are settled at expiration.
D. Futures contracts are standardized and traded on an exchange, reducing counterparty risk.
Question 3:
A portfolio manager creates a bull call spread by buying a call option with a strike price of $50 for a premium of $5 and selling a call option with a strike price of $60 for a premium of $2. Both options have the same underlying asset and expiration date. What is the maximum possible profit from this strategy?A. $3
B. $7
C. $10
D. Unlimited
Question 4:
The "theta" of an option measures the sensitivity of the option's price to a change in:A. The price of the underlying asset.
B. The volatility of the underlying asset.
C. The time to expiration.
D. The risk-free interest rate.
Question 5:
A bank has entered into a plain vanilla interest rate swap where it receives a fixed rate of 5% and pays a floating rate of SOFR on a notional principal of $20 million. If the next SOFR rate is set at 4.5% for a 180-day period, what is the net payment and who makes it? (Assume a 360-day year).A. The bank pays $50,000.
B. The bank receives $50,000.
C. The bank pays $100,000.
D. The bank receives $100,000.
Question 6:
The primary role of a central counterparty (CCP) in the derivatives market is to:A. Provide leverage to market participants.
B. Act as a buyer to every seller and a seller to every buyer.
C. Set the prices for standardized derivatives contracts.
D. Guarantee a profit for members of the exchange.
Question 7:
An analyst is evaluating a 5-year, 6% annual coupon bond with a face value of $1,000. The bond is currently trading at par. If the yield-to-maturity suddenly increases by 50 basis points, the bond's price will:A. Increase.
B. Decrease.
C. Remain unchanged.
D. Change in an indeterminate direction.
Question 8:
According to put-call parity, a portfolio consisting of a long European call option and a short European put option with the same strike price and expiration date is equivalent to:A. A long forward contract on the underlying asset.
B. A short forward contract on the underlying asset.
C. A long position in the underlying asset financed by borrowing.
D. A short position in the underlying asset combined with lending.
Question 9:
A risk manager is concerned about the convexity of their bond portfolio. A bond with high positive convexity will experience:A. A smaller price increase for a given drop in yields compared to a linear model.
B. A larger price increase for a given drop in yields and a smaller price decrease for a given rise in yields.
C. A symmetrical price change for both increases and decreases in yield.
D. A larger price decrease for a given rise in yields compared to a less convex bond.
Question 10:
Which of the following is a key advantage of an over-the-counter (OTC) market compared to an exchange-traded market?A. Greater price transparency.
B. Lower counterparty credit risk.
C. Higher liquidity for all products.
D. Greater flexibility in contract terms.
Answers and Explanations
Question 1: Correct Answer is B) $8.99
Worked example:
This is a classic mid-life forward contract valuation. The key is to find the present value of the difference between the original agreed-upon forward price and the current spot price.
Step 1: Calculate the original forward price (F₀).
The formula for a non-dividend-paying stock with continuous compounding is: F₀ = S₀ × e^(rT)- S₀ = $100 (initial stock price)
- r = 0.04 (risk-free rate)
- T = 0.5 (6 months)
F₀ = $100 × e^(0.04 × 0.5) = $100 × e^(0.02) = $102.02
Step 2: Calculate the value of the long forward position at time t.
The value (f) is the current stock price (St) minus the present value of the delivery price (F₀). Three months have passed (t=0.25), so three months remain (T-t = 0.25). The formula is: f = St − (F₀ × e^(−r(T−t)))- St = $110 (current stock price)
- F₀ = $102.02 (from Step 1)
- r = 0.04
- (T−t) = 0.25 (3 months remaining)
f = $110 − ($102.02 × e^(−0.04 × 0.25)) f = $110 − ($102.02 × e^(−0.01)) f = $110 − ($102.02 × 0.99005) f = $110 − $101.00 = $9.00 (closest answer is $8.99)
Exam trap:
The most dangerous distractor is A) $7.92. This answer comes from incorrectly using simple interest instead of the specified continuous compounding. An unprepared candidate might calculate F₀ = 100 (1 + 0.04 0.5) = $102, then find the value as (110 - 102) / (1 + 0.04 * 0.25) = $7.92. The exam frequently tests whether you can apply the correct compounding convention under pressure. C) $10.00 is the simple difference in stock prices, ignoring time value entirely.
Question 2: Correct Answer is D)
Futures contracts are standardized financial instruments that trade on organized exchanges. This standardization and the presence of a clearing house (CCP) drastically reduce counterparty risk compared to forwards, which are private, customizable agreements.- Trap A: This is backward. Forwards are customizable (OTC), while futures are standardized.
- Trap B: This is also backward. The daily settlement (marking-to-market) of futures reduces counterparty risk by preventing large losses from accumulating.
- Trap C: This swaps the definitions. Futures are marked-to-market daily. Forwards are typically settled only at expiration.
| Feature | Forward Contract | Futures Contract |
|---|---|---|
| Market | Over-the-counter (OTC) | Exchange-traded |
| Standardization | Customizable terms | Standardized terms |
| Counterparty Risk | High (bilateral) | Low (clearing house) |
| Settlement | At expiration | Daily (marked-to-market) |
| Liquidity | Generally lower | Generally higher |
Question 3: Correct Answer is B) $7
A bull call spread involves buying a call with a lower strike and selling a call with a higher strike to profit from a moderate rise in the underlying's price.- Net Premium Paid (Cost): $5 (for the long call) - $2 (from the short call) = $3. This is your maximum loss.
- Maximum Profit: The profit is capped by the short call. The maximum value of the spread is the difference between the strike prices ($60 - $50 = $10). Your maximum profit is this spread minus the initial cost.
- Calculation: Max Profit = ($60 - $50) - $3 = $10 - $3 = $7.
- Trap A ($3): This is the net premium paid, which represents the maximum loss, not profit.
- Trap C ($10): This is the gross spread between the strikes, but it fails to account for the initial cost (net premium) of the position.
- Trap D (Unlimited): Unlimited profit is a characteristic of a single long call option, not a spread strategy where the short call caps gains.
Question 4: Correct Answer is C) The time to expiration.
This is a definitional question about the option Greeks. Theta, or "time decay," measures the rate at which an option's value declines as the expiration date approaches, all else being equal. For long option positions, theta is typically negative.- Trap A (Underlying price): This is Delta.
- Trap B (Volatility): This is Vega.
- Trap D (Interest rate): This is Rho.
Question 5: Correct Answer is B) The bank receives $50,000.
This is an interest rate swap calculation. The bank receives fixed and pays floating. Since the fixed rate is higher than the floating rate for this period, the bank will be a net receiver.- Fixed Leg Payment (Received): $20,000,000 × 5% × (180/360) = $500,000.
- Floating Leg Payment (Paid): $20,000,000 × 4.5% × (180/360) = $450,000.
- Net Payment: The bank receives $500,000 and pays $450,000. The net receipt is $500,000 - $450,000 = $50,000.
- Trap A: This gets the direction wrong. Since the fixed rate (5%) is higher than the floating rate (4.5%), the fixed-rate receiver gets paid.
- Trap C & D: These amounts ($100,000) would result if you forgot to adjust for the half-year period (180/360). This is a very common error under time pressure.
Question 6: Correct Answer is B)
The fundamental purpose of a central counterparty (CCP) is to mitigate counterparty credit risk. It does this by interposing itself between the two sides of a trade, becoming the buyer to every seller and the seller to every buyer. This process, called novation, means participants face the credit risk of the CCP, not each other.- Trap A: While CCPs require margin, their primary role is risk management, not leverage provision.
- Trap C: Prices are set by market supply and demand, not by the CCP.
- Trap D: CCPs manage risk; they do not guarantee profits.
Question 7: Correct Answer is B) Decrease.
This question tests the fundamental inverse relationship between bond prices and yields. When the required yield (YTM) on a bond increases, the present value of its future cash flows decreases. Therefore, its price must fall. Because the bond is trading at par, its coupon rate (6%) equals its YTM. An increase in YTM to 6.5% will cause the price to drop below par.- Trap A: This is the opposite of the correct relationship. Prices rise when yields fall.
- Trap C: The price only remains unchanged if the YTM does not change.
- Trap D: The direction is always determinate for a standard bond.
Question 8: Correct Answer is A) A long forward contract on the underlying asset.
The put-call parity formula is often written as C + PV(K) = P + S₀. Rearranging it to match the question gives: C - P = S₀ - PV(K). The left side (Long Call, Short Put) is the synthetic position. The right side is equivalent to taking a long position in the stock today (S₀) and borrowing the present value of the strike price (K), which is the exact payoff structure of a long forward contract.- Trap B: A short forward would be replicated by a short call and a long put (P - C).
- Trap C & D: These describe parts of the replicating portfolio but are not the most precise answer. The combination of the asset and borrowing/lending specifically replicates the forward contract.
Question 9: Correct Answer is B)
Positive convexity is a desirable property for bondholders. It describes the curvature in the price-yield relationship. For a given change in yield, a more convex bond will have a more favorable price change than a less convex bond. This means its price increases more when yields fall and decreases less when yields rise.Exam trap:
Duration is a linear, first-order approximation of the price change. Convexity is the second-order adjustment that accounts for the curve. Candidates often forget that convexity benefits the bondholder in both directions of interest rate movements relative to the duration estimate.
- Trap A & D: These are incorrect. Convexity improves the price outcome for the bondholder compared to a linear estimate.
- Trap C: The price change is asymmetrical, which is the entire point of convexity.
Question 10: Correct Answer is D) Greater flexibility in contract terms.
OTC markets are private networks of dealers. Their primary advantage is the ability to create bespoke, non-standardized contracts tailored to the specific needs of the counterparties. This allows for customized maturity dates, notional amounts, and underlying assets that are not available on an exchange.- Trap A: OTC markets are notoriously opaque. Price transparency is a key feature of exchange-traded markets.
- Trap B: Counterparty risk is significantly higher in OTC markets without a CCP, a key driver of post-2008 financial regulation.
- Trap C: Exchanges generally offer higher liquidity for their standardized contracts.
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How to Interpret Your Quiz Score
This isn't about passing or failing; it's about diagnosis. Use your score to create a specific action plan for this week.
- 8-10 Correct: Excellent. You have a strong grasp of the core concepts and calculations. Your focus now should be on speed and consistency. Your task this week: complete two timed 30-question practice sets on FMP topics within the VoraPrep question bank to build exam-day stamina.
- 5-7 Correct: Solid foundation, but with clear gaps. You likely missed a multi-step calculation (like the Forward valuation) or a key conceptual link (like Put-Call Parity). You understand the "what" but not always the "why." Your task this week: review the specific chapters on the topics you missed. Don't just re-read. Use VoraPrep's adaptive flashcards to drill the formulas until they are automatic.
- 0-4 Correct: Red flag. You have significant content gaps and are likely relying on surface-level memory. More random practice will not help yet. Your task this week: go back to the source material. If you missed the swap question, spend two hours exclusively on the mechanics of interest rate swaps. You must build the conceptual framework from the ground up. A good starting point is our guide on How Hard is the FRM Exam? to reset your study plan.
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