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

A risk committee is comparing countries by sensitivity to a global geopolitical risk shock. According to the findings of the IMF April 2025 GFSR chapter, which statement best describes how the equity market impact of elevated geopolitical risk differs across economies?

Emerging markets and countries with higher direct geopolitical exposure or weaker fundamentals tend to suffer larger equity price declines and wider sovereign spreads when geopolitical risk rises. The impact is not uniform across economies, so risk managers should differentiate country shocks rather than apply one global shock.

  1. AImpact is identical across all countries because geopolitical risk is a global factor
  2. BEmerging markets and economies with greater direct exposure or weaker fundamentals tend to see larger equity declines and greater sovereign spread wideningCorrect
  3. CAdvanced economies always suffer larger equity declines than emerging markets
  4. DImpact appears only in commodity prices, with no effect on equity or sovereign spreads

Explanation

The chapter finds that adverse effects are not uniform: countries with higher geopolitical risk exposure and weaker fundamentals, notably many emerging markets, tend to experience larger equity price falls and wider sovereign spreads. Uniform impact or absence of effect on equity conflicts with this finding.

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