Question

Political risk as it pertains to international finance, how to measure political risk, implications of political risk, how to mitigate political risk in finance

Answer 1

Risk:- An investor invest his money with the objective of getting return. The uncertainty of income and get his investment back is called Risk.

Types of Risk

There are two types of Risk:-

1. Systematic Risk: - Risk which affects all the companies in the market is called Systematic Risk.
2. Unsystematic Risk:- Risk which affect only to one company is called Unsystematic Risk.

Political Risk

Political Risk is kind of Systematic Risk as it make affect all the companies in the country.

Measurement of Political Risk

Measurement of this type of risk has not been standardized and formalized but can be assessed by following ways:-

1. Financial Policies: - Stable policies show less risk involvement and vice-versa.
2. Corruption Level: - Corruption countries have more political risk than others.
3. War Situation: - Internal or international war condition is worst for any kind of investment.

There may be other indicators exist to assess political risk.

Implication of Political Risk

1. Political instability
2. Loss of international finance
3. Loss of Reputation of country
4. Huge inflation of currency
5. Loss of employment and businesses

Mitigate Political Risk

1. By hedging of investment.
2. By taking insurance of investment on this type.
3. Diversification of investment.