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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 to assess how geopolitical risk affects capital flows to a country. Which approach best captures the vulnerability channel emphasized for portfolio flows?

A flows-at-risk approach is best. It links the lower tail of portfolio flows to geopolitical risk measures and country vulnerabilities, showing how severe outflows could become under stress. Average calm-period flows, GDP ranking or branch counts do not capture downside tail risk from geopolitical shocks.

  1. AEstimate flows-at-risk, linking the lower tail of portfolio flows to geopolitical risk indicators and country vulnerabilitiesCorrect
  2. BUse only the average level of portfolio flows in calm periods
  3. CRely on the country's nominal GDP rank
  4. DMeasure only the number of domestic bank branches

Explanation

A flows-at-risk approach focuses on the tail of the flow distribution and how it worsens with geopolitical risk, conditional on vulnerabilities. Calm-period averages, GDP rank and branch counts do not capture tail outflow risk.

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