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International Financial Management > L2 > Flashcards

L2 Flashcards

1
Q

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Country risk

A

any macro/micro risk that effects (or could) an investment in a foreign country

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2
Q

Soverign risk

A

gov fails to honour their debt obligation to creditors

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3
Q

Country risk componets

A
  1. political
  2. economci
  3. financial
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4
Q

Polictical risk factors

A
  1. international conflicts e.g., sanctions
  2. ethnic violence, political coup
  3. expropriation of foreign owned assets
  4. unexpected changes to the rule of the game
  5. buracracy and corruption in host gov
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5
Q

international conflicts

Polictical risk factors

A

could lead to:
* loss current earnings, market share
* face large pen for viloating sanctions

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6
Q

expropriation of foreign owned assets

Polictical risk factors

A

worst case- gover takes org sub with no sub
every state has the right to exploit its wealth and control over natutal resoruces

can get back through negotiation or intervention of home

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7
Q

Unexpected changes in rule of game

Polictical risk factors

A

increase taxes
tighten enviromental standards
increase exchange controls

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8
Q

Economic risk

A

health of host country economy
* gdp
* exch stability
* inflation
* employment

important to an org as it effects demand for goods, market comp, labour cost, etc

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8
Q

Financial Risks

A

host gove capacity and willingness to honour foreign debt
* gov debt/gdp

defaults have a spreading effect on banking systems sustainability. effects banks funding terms for private sector

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9
Q

How do they measure the country risk

A

PRS group scale:
International Country Risk Guide (ICRG)

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10
Q

ICRG weights

A

Financial- 25%
Economic- 25%
Political- 25%

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11
Q

Risk Ratings- ICRG

A

1- 59.9 high
60-69.9 med
70- 100 low

  • financial and economic risk is measured between 1-50

covers over 140 countries

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12
Q

Political risk Components ICRG

A

6p- law & Order
12p- gov stability
12p- invest profile

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13
Q

Economic risk Components ICRG

A

this is countries economic prospertity
5p- GDP per head of population
10p- annual inflation rate

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14
Q

Financial risk Components ICRG

A

this is the state capaictiy to earn foreign exchange to repay foreign currency debt
10p- exchange rate stability
10P- Foreign debt as a % of GDP

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15
Q

ICRG allows comps to:

A

compare risk of doing buis in a country
monitor time variation of risk in a country

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16
Q

WB’s worldwide goverance indicators

A
  1. process of selecting, monitoring, replacing goe
  2. abiility to create and implement sound economic policies
  3. respect of the rules

on a scale between -2 (very risk) and +2 (low risk)

17
Q

WB Governace indicators
1. process of selecting gov, etc,.

A

voice and accountability
political stability

18
Q

WB Governace indicators
2.create sound economic policy

A

goverment efficiency
regulatory quality

19
Q

WB Governace indicators
3.Repsect of Rules

A

Rules of law
Control of corruption

20
Q

Soverign Risk

A

Goverment Defaults
solution: massive debt restrucutre/ Austerity

21
Q

austerity

A

goverment cuts on public debt through public spending

22
Q

Why is soverign debt such a problem

A

Cant take the country to court
goverment isnt able to bottow as easily going fwd
can cause an economic crisis to worsen

23
Q

Measures of sovering Risk

A

Soverign Credit Spread
CDS (Soverign default swaps
Soverign Credit Ratings

24
Q

Soverign Credit Spreads

A

yield (gov)- yield (Bench mark gov)
yield gov= interest rate of gov debt securities to soverign
bench= interest rate of benchmark default free debt securuites with similar charateristics
captures market perception of risk

25
Q

CDS

A

Protection seller agrees to compensate the protection buyer if a defualt event occurs before maturity

seller charges a premium for protection
* reflects cost of getting protection

CDS spread = annual CDS premium

26
Q

CDS and Credit Spread advantages and disadvanatages

A

+ move quickly in response to LT and transitory developments in soverign risk
-might not be available for soverign risk, if the country is less active in the capital market
-might be noisy (contaminated by liquidty risk premium)

27
Q

SCR

A

rating agecnices fwd looking opinion on the prob of soverign defaults
-less timely than CDS/ Credit Spreads
+determined by an accurate assessing model

28
Q

Soverign risk Spill over to corps: Channels

A
  1. Financial
  2. FISCAL
  3. Other
  4. Rating
29
Q

Sov risk Financial channel

A

banking secotr sensitive to soverign risk, crowds out loans to corp

30
Q

Sov risk Fiscal Channel

A

Busi linkages that a corp might have with gov:
hold equities

31
Q

Sov risk Other

A

Capital control Measures
tax increase
asset expropriation

32
Q

Sov risk Rating Channel

A

-corp debt is risker than soverign, hence the corp rating is capped at soverign risk of country

  1. when risk rises, firms with higher rating than sov will go down first
  2. vulnerable firms more likely to be downgraded- corp managers need to adjust their invest and financial polies in reposnse
33
Q

Impact of soverign risk for corp financing and investing

A

Capital structure
investment
cost of debt

34
Q

Managing country risk

A

shows systematic risk
should be accounted for in projects apprisials
purchase Protection e.g. BIT

35
Q

BIT

A

Bilateral Investment Treaties
* treaty between home and host state to protect FDI projects
* gives strong incentive for host to honour its obligation under international law and its agreement with FDI investors

36
Q

BIT example UK-Colombia 03/2010

A

Protects British investors doing business in colombia and vice versa
provision
* fair and equitable treatment - damages to assets during war
* free transfer of money in and out
* limit host state to expropriate foreign invest

37
Q

Polticial Risk Insurance

A

3 common groups of risk events
1. currecny incovertiblity and non transferability
2. expropriation of assets
3. war, terrorist attacks

protection providers:
- overseas prviate investment corp (OPIC)
-

38
Q

Covid 19 sover risk

A

measured soverign risk with 5 year CDS prem
findings
* soverign risk increases with the spread
* Across different countries, the pandemic affects sovereign risk differently.
* A strong public finance profile and solid macroeconomic fundamentals can help reduce the negative impact of the pandemic on sovereign risk

39
Q

Across different countries, the pandemic affects sovereign risk differently.

A

high fiscal space countries affected less than low fiscal space

International Financial Management (9 decks)

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