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FRM Part II · FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

A bank's risk team wants to distinguish between geopolitical risk events and geopolitical risk threats when using GPR-style measures. Which approach to measurement is most consistent with how the GPR index is designed?

The GPR methodology distinguishes between threats, such as tensions and war threats, and acts, such as actual wars or terrorist attacks, using separate subindices. This is because anticipated and realised geopolitical events can affect markets and the economy in different ways.

  1. ASeparate subindices for actual adverse events and for threats or tensions, since both may influence markets differentlyCorrect
  2. BUse only actual realised acts such as wars, because threats have no measurable effect
  3. CCombine all news into a single count that excludes any discussion of tensions
  4. DMeasure risk solely through changes in commodity prices

Explanation

The GPR framework includes a threats subindex and an acts subindex, recognising that anticipated and realised events may have different effects. Excluding threats or relying only on commodity prices contradicts the news-based design.

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