Question

Compare and contrast country risk analysis with exchange rate volatility.

Answer 1

The risk associated with the exchange rate volatility to the country are:

1) Import and Export : The exchange rate volatility amount a great deal of difference in the Import and Export. Improvement in the local currency will improve export or otherwise.

2) Terms of trade : The exchange rate volatility will amount to favouring or dis-favour the terms of trade of a country. Higher the export will improve the terms of trade whereas higher import will extend the terms of trade balance.

3) Allied Activites : The activities like Tourisum will improve in the country if local currency depreciates because more local currency will be available to tourists in exchange.

4) Interest rates : Interest rate will increase if the local currency improves in comparison to the other currencies because the local currency become more and more dearer and people will be get away unless higher interest is offered towards their money.

5) Inflation : There will be a increase in inflation if the local currency improves as local currency become dearer or vice-versa.

6) Improvement and development in the country: When there is a improvement in the local currency, the country's economy moves towards the development path because higher exports will improves the Balance of trade and production of goods in the country increases.

Thus, the exchange rate volatility will bring in a lot of risk to a country and its economy both the favouring and dis-favouring one.