Introduction to Geopolitics: formula sheet

Key formulas

Actor types

Actors = nation-states + non-state actors + supranational bodies

Classify by source of power: sovereignty, private or group resources, or authority delegated by member states.

Common state objectives

Security, economic prosperity, political stability, influence

A state action usually serves one or more of these. Use them to explain why the state acted.

Classification test

Sovereign over territory? Yes = nation-state. Created by several states? Yes = supranational. Otherwise = non-state

Apply the tests in this order to avoid mislabelling.

Three toolkits

National security + Economic + Financial

Classify any tool into one group first. Some tools, such as sanctions, can overlap economic and financial.

Tariff effect

Domestic price of import ↑ → domestic producers gain, consumers lose

Tariffs are a tax on imported goods. They can also invite retaliation.

Capital controls

Restrict capital inflows or outflows

Aim to stabilise currency or protect the financial system. They reduce investor freedom to move money.

Cooperative stance

Shared rules + open borders → more trade, more capital flows, lower political risk

A tendency, not a guarantee. Gains are usually uneven across groups.

Nationalist or competitive stance

National interest first → tariffs, sanctions, capital controls → less trade, more uncertainty

Protected domestic sectors may gain while consumers and exporters often lose.

Regionalism

Integration inside a bloc, possibly barriers to outsiders

Can create trade among members while diverting trade from non-members.

Globalization vs deglobalization

Globalization = rising integration; deglobalization = falling integration

Look for direction of change in trade, capital and supply chains.

Event risk

Known date + uncertain outcome

Scheduled events such as elections or referendums. Timing is known, result is not.

Exogenous risk

Unexpected + sudden + outside the system

No warning and no date. Hard to forecast, so focus on resilience.

Thematic risk

Long-lasting + broad + gradual

Slow-building trends affecting many markets. May have no single trigger date.

Assessment dimensions

Likelihood, Impact, Velocity

Likelihood = how probable. Impact = how large the effect. Velocity = how fast it hits.

Scenario-weighted expected value

E(V) = Σ [ pᵢ × Vᵢ ]

Probabilities across scenarios must sum to 100%. Use it for expected portfolio value or expected return.

Scenario-weighted expected return

E(R) = p₁R₁ + p₂R₂ + … + pₙRₙ

Same logic applied to returns. It is a probability-weighted average, not a forecast of the most likely outcome.

Value of an asset under risk

Value = Σ CFₜ ÷ (1 + r)ᵗ, with r = risk-free rate + risk premium

Geopolitical risk can lower CFₜ, raise r, or both. Either way, value falls.

Risk management responses

Avoid, mitigate, transfer (hedge or insure), share, or accept

Match the response to likelihood and impact. High impact with low likelihood often suits hedging or insurance.

Quick revision

• Geopolitics links power, geography and politics to economic and market outcomes.
• Actors include states and non-state actors; know each actor's main objectives.
• Tools fall into three groups: national security, economic and financial.
• Economic tools include measures such as tariffs and trade restrictions; financial tools work through access to capital and payment systems.
• Cooperation and competition coexist; do not assume the world is only one or the other.
• Globalization trends can strengthen or weaken over time; know the drivers in the curriculum.
• Geopolitical risk must be classified by type before it is assessed.
• Assessment looks at both the likelihood of an event and its possible impact.
• Impact reaches investments through channels such as trade, supply chains, currencies, rates and sentiment.
• Effects differ by asset class, sector and country, so avoid one-size-fits-all answers.
• Diversification and scenario analysis are core ways to manage geopolitical risk.
• Choose the option that fits the curriculum logic, not a news headline.

Common mistakes

• Treating nationalism and globalization as the same thing or as pure opposites that cannot coexist. Fix: Define each in one line: globalization is integration across borders; nationalism puts national interests first. Remember a country can show both in different policies.
• Defining geopolitics only as war or military conflict. Fix: Remember it covers cooperation as well as competition, and economic and financial tools as well as security.
• Calling a supranational body a non-state actor without qualification. Fix: Ask who created the body. If states formed it and delegated a mandate, treat it as supranational.
• Assuming nation-states are always the most powerful actor. Fix: Remember that large firms or armed groups can have real influence. Power depends on the situation, not only on legal status.
• Treating tariffs and sanctions as the same thing Fix: A tariff is a tax on imports. A sanction is a restriction on dealings with a target and can be trade, financial or personal.
• Calling capital controls an economic trade tool Fix: Capital controls limit movements of money, so they are financial tools.
• Treating regionalism as the same as globalization. Fix: Remember regionalism is integration within a group and may raise barriers to outsiders. Globalization is worldwide integration.
• Assuming cooperation benefits everyone equally. Fix: Note that open borders can hurt some domestic industries and workers even when overall gains exist.
• Calling a scheduled election an exogenous risk because the result is uncertain. Fix: A known date makes it event risk. Exogenous risk needs a surprise with no schedule.
• Treating thematic risk as a single dated event. Fix: Thematic risk is a long, broad trend. A headline may be a symptom, not the risk itself.

Exam tips

• Expect short conceptual questions with three wordy options; the correct one is usually the balanced definition.
• Reject options with absolute words like always, never or only unless the definition supports them.
• Learn one-line definitions of geopolitics, globalization, nationalism, cooperation, competition and geopolitical risk.
• Remember there is no penalty for wrong answers, so always answer; eliminating one option gives you a 50% guess.
• Questions are mostly classification: decide the actor type first, then the objective.
• Use the sovereignty and delegated-mandate tests to eliminate two options quickly.
• Watch for options that mix a correct actor with a wrong objective, or the reverse.
• Expect examples such as multinationals, NGOs, the UN, IMF, WTO and the EU. Learn where each sits.