F1: Introduction and Country Risk Flashcards
What are the core assumptions in finance?
Markets are efficient: low transaction costs and people have complete information
Information efficiency: all relevant players have the same, relevant information so prices should reflect this complete information
What are the 4 reasons to why it can be difficult for a foreigner to do business abroad?
1: Spatial distance
2: Unfamiliarity with and a lack of roots in the host country
3: Lack of legitimacy in the host country
4: Restrictions imposed by the home country
For how long will a business continue to grow?
1: Firms will grow as long as the marginal cost of a transaction in the market is the same as that of an internal transaction
2: Firm growth is dependent on the relative costs of market transactions and internal transactions
What 4 fields of activity does international finance managers work with?
1: Risk management
2: Valuation
3: Funding
4: Connecting it all, and to firm strategy
Country risk: What characterizes macro risk?
1: Affects all firms in the host country
2: To diversify macro risks a firm will have to invest in different countries
Country risk: What characterizes micro risk?
1: Specific to an industry, firm or project within a country
2: To diversify micro risks a firm can invest within a select country
Country risk: What characterizes political risk?
1: Host government unexpectedly changes “the rules of the game”
Country risk: What characterizes financial risk?
1: Unexpected events in a country’s financial, economic or business life
What indicates a risk is insurable?
1: The potential loss is identifiable in time, place, cause, and amount (e.g. repatriation of profits)
2: A large number of firms (not necessarily within a country) is exposed to the risk (e.g. tariff increase)
3: The occurrence of losses is independently distributed across potential firms (not necessarily within a country) incurring losses (e.g. war, revolution)
4: The loss is outside the influence of the insured (e.g. expropriation)
What do firms do if risk is uninsurable?
1: They structure their environment to avoid risk (lobbying)
2: Intellectual Property protection (e.g. patents) is a form of protection against country risk
3: Financially, uninsurable risk can be dealt with through 1) expecting a short pay-back period and 2) adjust projected CF
What do firms do if risk is uninsurable?
1: They structure their environment to avoid risk (lobbying)
2: Intellectual Property protection (e.g. patents) is a form of protection against country risk
3: Financially, uninsurable risk can be dealt with through 1) expecting a short pay-back period and 2) adjust projected CF
How are losses valued and minimized?
1: Losses are valued as: E[Loss]=P[Loss]*E[Value├Loss┤]
2: The probability of losses are minimized through a carefully selected investment strategy
3: The size of losses is minimized by maintaining operational flexibility
Checks and balances?
1: Checks and balances counterbalance the political power of e.g. the executive branch of government
2: Firms usually like checks and balances in emerging markets because they reduce the influence of individual political actors on firm activities
