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What is political risk? What are the sources of political risk for international companies? How are they connected with the types of political risks?
- Political actions that affect business
Direct Effect -- The chance that political actors will change laws, regulations, etc. or take other actions that directly affect business;
Indirect Effect -- The chance that political actors will change the economic environment, the attitudes of the population, or some other contextual factor that then indirectly affects specific businesses.
Political risk deals with: political structure(the governance system of a country);
authority (nature of particular governors);legitimacy (the response of the population
to the government); culture (the nature of the society being governed)
Sources:
Types:
-Governmental (Formal and informal political parties and government officials)
- Societal (NGOs, public interest groups, strong individual actors, local companies)
- External (stemming from the international environment): Supranational agencies, foreign governments and NGOs
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Define the categories of international political risk. Provide examples.
basic general types of risk:
1. Systematic Risk: A risk that in.uences a large number of assets. An example is political events. It is virtually impossible to protect yourself against this type of risk.
2. Unsystematic Risk: Sometimes referred to as “speci.c risk.” It is risk that affects a very small number of assets. An example is news that affects a speci.c stock such as a sudden strike by employees.
Specific types:
- Credit or Default Risk: This is the risk that a company or individual will be unable to pay the contractual interest or principal on its debt obligations. This type of risk is of particular concern to investors who hold bonds within their portfolio. Bonds with lower chances of default are considered to be “investment grade,” and bonds with higher chances are considered to be junk bonds (Moody’s bond-rating agency);
- Country Risk: This refers to the risk that a country will not be able to honor its financial commitments. Country risk applies to stocks, bonds, mutual funds, options, and futures that are issued within a particular country. This type of risk is most often seen in emerging markets or countries that have a severe deficit.
- Foreign Exchange Risk: When investing in foreign countries, .rms must consider the fact that currency exchange rates can change the price of the asset as well. As an example, if you are a resident of the United States and invest in some Japanese stock in Japanese yen, even if the share value appreciates, you may lose money if the Japanese yen depreciates in relation to the USdollar.
- Interest Rate Risk: A rise in interest rates during the term or debt securities hurts the performance of stocks and bonds.
- Political Risk: This represents the fi nancial risk that a country’s government will suddenly change its policies. This is a major reason that Second and Third World countries lack foreign investment.
- Market Risk: This is the most familiar of all risks. It is the day-to-day fluctuations in a stock’s price. Market risk applies mainly to stocks and options. It is in unstabil politically countries Iran,Iraq, Somali