Question

whats are Foreign exchange risk, political risk, economic risk, geographical risk, legal risk? with Examples (International Finance)

Answer 1

All these risks are related to the international business. The companies engaged in international business happens to face these risks in some stages of their business.

• The changes in the domestic currency value of assets, liabilities or operating income with respect to the changes in exchange rates is Foreign Exchange Risk. It is the uncertainty related to the changes in exchange rates between the two currencies. Example : Exchange rate between two countries.
• Legal risk is the risk arising due to legal enforceability of a contract or a transaction. Legal issues between the two trading countries in the international trade will be different. Examples are legal taxes, regulations, exchange and trade controls, tariff system, quotas system etc
• Political Risk is the risk that results from political changes or instability in the countries engaged in international business. Political stability is an important factor to attract foreign investment. Example : Frequent changes of government in a country is political instability.
• Economic risk arises out of the changes in macroeconomic factors like exchange rates, government policies, or political stability which will affect international business. Examples are changes in the monetary, fiscal policies
• Geographical risk is associated with the risk of concentrating physical assets in a particular geographical area only based on the occurrences of natural events because of weather or other acts of nature in that region. Countries engaged in international business will have different geographical characteristics. Example : gold holdings in countries