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

A risk manager notes that the GPR index jumped sharply in a month following a major attack, then reverted within two months. She wants to separate geopolitical 'threats' from 'acts' when interpreting the index. Which interpretation is most consistent with the way the GPR index is constructed?

The GPR index has separate threat and act sub-indices built from news text. Threats cover things like war threats and military buildups, while acts cover realized events such as war beginnings and terror attacks. Ratings changes or trading volumes play no role in the construction.

  1. AThe index only records realized acts such as the start of wars, so threats are excluded
  2. BSub-indices distinguish articles about threats and escalating tensions from those about realized acts like war beginnings and terror actsCorrect
  3. CThe index separates threats from acts by using sovereign rating changes
  4. DThe index weights threats and acts using trading volume in safe-haven assets

Explanation

The GPR index has sub-indices for geopolitical threats (e.g., war threats, peace disruptions, military buildups) and geopolitical acts (e.g., beginning of war, escalation, terror acts). This distinction relies on news text, not ratings or trading volumes. Option A is wrong since threats are explicitly included.

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