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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 reviews how geopolitical risk is typically measured in news-based indices used in financial stability analysis. Which description best fits such an index?

A news-based geopolitical risk index measures the share of newspaper articles that discuss adverse geopolitical events such as wars, tensions or terrorist threats. It is text-derived, not a market price, volatility or reserves measure, so it can be tracked over time and across countries.

  1. AIt counts the share of newspaper articles that mention adverse geopolitical events, such as war or terrorist threats, in a given periodCorrect
  2. BIt is the implied volatility of a basket of sovereign bonds issued by countries in conflict
  3. CIt is the change in the official foreign exchange reserves of countries involved in conflicts
  4. DIt is the spread between oil futures and spot prices during periods of military action

Explanation

News-based geopolitical risk indices are built by counting the frequency of articles discussing adverse geopolitical events relative to total articles. The other options describe market or reserve variables, not text-based measures.

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