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

A portfolio manager uses a country-specific geopolitical risk index. Over the last year the index for Country X rose from 80 to 110, where the index is normalized so that 100 equals the historical average. A model estimates that each 10-point rise in the index is associated with a 15 basis point widening in Country X's sovereign spread, other factors constant. What is the implied spread widening from the move?

The index rose 30 points, which equals three 10-point increments. At 15 basis points per increment, the implied sovereign spread widening is 45 basis points, holding other factors constant.

  1. A30 bp
  2. B45 bpCorrect
  3. C60 bp
  4. D165 bp

Explanation

The index rose 30 points (110 - 80). Three 10-point increments times 15 bp equals 45 bp. 30 bp uses only two increments; 165 bp wrongly multiplies by the index level 110/10 times 15.

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