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

During a sudden escalation of geopolitical tension, a fund observes gold and US Treasury prices rising while emerging market equities and high-yield bonds fall. Which concept best explains this pattern?

This is a flight to safety. Under geopolitical stress, investors sell riskier assets such as emerging market equities and high-yield bonds and buy perceived safe havens like gold and US Treasuries, pushing safe-asset prices up and risky-asset prices down.

  1. AFlight to safety, with investors shifting from riskier assets to perceived safe havensCorrect
  2. BCarry trade unwinding caused by higher domestic policy rates
  3. CConvexity hedging by mortgage investors
  4. DIndex rebalancing at quarter-end

Explanation

Rising demand for safe havens such as gold and Treasuries alongside selling of risky assets is the classic flight-to-safety response to geopolitical stress. The other options do not fit the described cross-asset pattern.

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