What FRM Part 1 Financial Markets & Products actually tests
Financial Markets and Products is 30% of the Part 1 exam:
| Area | What it covers |
|---|---|
| Financial Institutions | Banks, insurers, pension funds, fund management, systemic risk |
| Interest Rates | Spot/forward/par rates, day-count conventions, compounding, yield curve construction |
| Bond Markets | Treasury, corporate, agency, municipal bonds, repo, securitisation basics |
| Foreign Exchange | Spot and forward FX, covered interest rate parity, cross-currency basis |
| Futures & Forwards | Mechanics, cost-of-carry pricing, basis risk, contango/backwardation |
| Swaps | Interest rate swaps, currency swaps, equity swaps, CDS mechanics |
| Options | Payoffs, moneyness, interest rate caps/floors/swaptions |
| Commodity Markets | Contango, backwardation, convenience yield |
Why FX parity conditions are a recurring FRM theme
Covered interest rate parity is the FX version of the same no-arbitrage logic tested elsewhere (put-call parity for options, cost-of-carry for futures). Once you recognize the pattern — a forward price/rate must reflect the cost of financing the position — the specific formula becomes much easier to derive under pressure instead of memorize.
Sample question: Covered Interest Rate Parity
Financial Markets & Products · Medium difficulty
The spot USD/EUR exchange rate is 1.10 (USD per EUR). The 1-year USD interest rate is 5%, and the 1-year EUR interest rate is 2%. Using covered interest rate parity, what is the 1-year forward USD/EUR rate?
A. 1.0676
B. 1.1000
C. 1.1324
D. 1.1550
The correct answer is C — 1.1324.
Covered interest rate parity: F = S × (1 + r_domestic) / (1 + r_foreign) = 1.10 × (1.05 / 1.02) = 1.10 × 1.0294 = 1.1324. This makes sense directionally: USD carries the higher interest rate, so under parity it must trade at a forward discount (weaker) relative to EUR — exactly what a higher forward USD/EUR rate reflects, since more dollars are needed to buy one euro in the future.
Covered interest rate parity: F = S × (1 + r_domestic) / (1 + r_foreign) = 1.10 × (1.05 / 1.02) = 1.10 × 1.0294 = 1.1324. This makes sense directionally: USD carries the higher interest rate, so under parity it must trade at a forward discount (weaker) relative to EUR — exactly what a higher forward USD/EUR rate reflects, since more dollars are needed to buy one euro in the future.