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

A risk team wants an early signal of investor-driven vulnerability to geopolitical risk in a frontier market. Which indicator would be most informative for that purpose?

Rapid growth in non-resident holdings of short-term local debt together with widening sovereign spreads is the most informative signal. It shows reliance on flighty foreign money and deteriorating investor sentiment, indicating heightened risk of outflows under geopolitical stress.

  1. ARapid growth in non-resident holdings of short-term local debt combined with widening sovereign spreadsCorrect
  2. BIncrease in domestic household savings rates
  3. CLower inflation volatility in the prior decade
  4. DHigher number of listed domestic companies

Explanation

Fast-growing, short-term foreign holdings are easy to reverse, and widening spreads suggest changing investor risk perception, together signalling flow vulnerability. The other options are not direct measures of investor flow risk.

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