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

A chief risk officer notes that geopolitical risk spikes can cause investors to withdraw from funds exposed to affected countries. Which implication for financial stability is most consistent with the IMF April 2025 GFSR chapter discussion?

Geopolitical risk spikes can prompt investor outflows from exposed markets, which amplify price declines and tighten financial conditions, especially where liquidity is thin or the investor base is flighty. Risk managers should therefore include flow-driven liquidity effects in stress scenarios rather than only direct valuation shocks.

  1. AFund outflows from exposed markets can amplify price declines and tighten financial conditions, particularly where investor bases are less stable or liquidity is thinCorrect
  2. BFund flows are unaffected, so only direct trade losses matter
  3. COutflows reduce volatility by removing speculative positions
  4. DSovereign spreads narrow because investors rebalance toward local bonds

Explanation

The chapter highlights that geopolitical risk can trigger portfolio outflows and amplify asset price declines and funding strain, especially in markets with thinner liquidity. The other options contradict this by claiming no flow effect, lower volatility or narrowing spreads.

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