Question

Country risk

1. A company is planning a project that must be located in a country that has a relatively high level of political risk. That is, there is a risk that after the company has made an investment in the project in the foreign country, the government may alter the regulatory environment to the disadvantage of the company. Identify and explain two things the company can do before beginning this project to reduce the political risk the project faces.

2. Identify two sources of country risk that are not related to or caused by political risk.

Answer 1

Answer 1)  Company should consider the following to better manage political risk

• Risk transfer using insurance : Political risk can be reduced by purchasing insurance. although ,it is tough to quantify political risk. Companies generally manage political risks to use export credit agencies (ECAs) of domestic country. These ECAs offer guarantees ,government-backed loans,and trade credit insurance to cover commercial and political risks.

• Transfer of Risk by use of other instruments:For some transactions or small projects, letters of credit can be used as an alternative instruments to political risk insurance.

• Political Risk can be avoided by Control Procedures

• Better understanding of Macro and a Micro factors of Political Risk

Answer 2)

Country risk refers to a set of risks linked with a particular country , which varies from country to country. The source of country risk apart from political risk are

• Economic risk: Such risk refers to a country's ability to pay back its debts and growth in the country GDP
• Sovereign risk: Such risk are associated with change in foreign exchange regulations by central bank.