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

Which statement best describes why a firm should monitor geopolitical risk indicators alongside traditional financial risk metrics?

Monitoring geopolitical indicators complements traditional metrics because they can signal rising risk before it appears in prices, helping firms adjust exposures and scenarios, though they neither replace models nor predict crisis timing precisely nor affect only emerging markets.

  1. AGeopolitical indicators replace the need for credit and market risk models
  2. BIndicators can provide early information on shifts in risk that may not yet be reflected in prices, supporting timely adjustment of exposures and scenariosCorrect
  3. CGeopolitical risk affects only emerging markets, so global firms can ignore it
  4. DIndicators guarantee accurate prediction of the timing of crises

Explanation

Such indicators complement existing models by signaling rising risk early and informing scenario design. They do not replace models, are not limited to emerging markets, and cannot predict crisis timing precisely.

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