FRM Part II · FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)
A risk manager at a global asset manager is reviewing how to incorporate geopolitical risk into portfolio oversight, drawing on the IMF April 2025 Global Financial Stability Report's discussion of geopolitical risk and financial stability. Which approach is most consistent with the policy and risk management implications drawn in that analysis?
The best approach is to bring geopolitical risk indicators into scenario analysis and stress testing. Geopolitical stress can raise downside risks to asset prices and stability through indirect channels, and historical VaR alone cannot capture such regime shifts, so forward-looking tools are needed.
- ATreat geopolitical risk as a one-off event risk that is fully captured by standard historical VaR
- BIntegrate geopolitical risk indicators into scenario analysis and stress testing, since elevated geopolitical risk can amplify downside risks to asset prices and financial stabilityCorrect
- CIgnore geopolitical risk for institutions without direct exposure to conflict regions
- DRely solely on insurance contracts to transfer all geopolitical risk
Explanation
The reading stresses that heightened geopolitical risk can raise downside risks to asset prices and stability, so institutions and supervisors should use forward-looking scenario analysis and stress tests. Historical VaR alone misses regime shifts, and indirect channels (markets, funding, supply chains) make ignoring non-exposed institutions wrong.
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