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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

48. What are the objectives of political risks analysis? Are they different from the objectives of international political environment analysis?

The effort to determine the causes or sources of risk and to map the relationships between causes.

Objectives in PRA: the primary one is to forecast the losses of risk; a secondary is to suggest means of managing the risk or avoiding the loss.

Analysis involves identification of variables, determination of their relationship to each other, establishing their contribution to a particular situation (data), and then projecting the future for purposes of a specific application.

There are predictors in the social, political or international system that could tell us something about the likelihood that a particular type of loss will occur. The challenge to the political risk analyst is to determine which variables and which combinations are likely to result in the threat of loss to the investor.

49. What are the elements of risks that should be formalized? Explain the methods of political risks analysis.

(1) Source: Risk from what?

(2) Target: Risk to whom or to what?

(3) Effect: Risk of what?

(4) Mechanism: How changes in the source cause changes in the probability of effect on the target.


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