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

A risk manager concludes that a country's portfolio flows are vulnerable to geopolitical shocks. Which mitigating factor, consistent with the GFSR's themes, would most plausibly reduce the vulnerability?

A deeper domestic institutional investor base together with stronger fiscal and external buffers most reduces vulnerability, because it lessens dependence on volatile foreign flows and gives the economy capacity to absorb geopolitical shocks without disorderly outflows.

  1. AA larger share of investors from non-resident, benchmark-driven funds
  2. BA deeper domestic institutional investor base and stronger macro-financial buffersCorrect
  3. CGreater reliance on short-term foreign currency debt
  4. DLower sovereign credit quality

Explanation

A deeper domestic investor base and stronger buffers help absorb shocks and reduce reliance on volatile foreign flows. The other options increase sensitivity to sudden stops.

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