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 quantify geopolitical risk for equity portfolio stress scenarios, following the approach used in the IMF April 2025 Global Financial Stability Report chapter on geopolitical risk. Which approach best describes how the chapter measures heightened geopolitical risk for its asset-price analysis?
The chapter uses news-based geopolitical risk indices, identifying spikes in the index and then measuring how equity prices, spreads, volatility and investor flows respond. It does not rely on the VIX alone, rating downgrades or military statistics, because those either mix in other risks or lag events.
- AUsing news-based geopolitical risk indices and identifying episodes when the index spikes, then studying asset-price and fund-flow responsesCorrect
- BRelying solely on realized volatility of the VIX to proxy for geopolitical tension
- CUsing only sovereign credit rating downgrades as the indicator of geopolitical events
- DCounting the number of military personnel deployed globally each quarter
Explanation
The chapter relies on text-based geopolitical risk indices built from news coverage, and analyzes how asset prices, volatility and flows respond when these indices rise. VIX alone or rating downgrades are not the measurement basis and would conflate geopolitical risk with general market stress or lagging credit signals.
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