L2

Question 1

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Country risk

Answer 1

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

Question 2

Soverign risk

Answer 2

gov fails to honour their debt obligation to creditors

Question 3

Country risk componets

Answer 3

1. political
2. economci
3. financial

Question 4

Polictical risk factors

Answer 4

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

Question 5

international conflicts

Polictical risk factors

Answer 5

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

Question 6

expropriation of foreign owned assets

Polictical risk factors

Answer 6

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

Question 7

Unexpected changes in rule of game

Polictical risk factors

Answer 7

increase taxes
tighten enviromental standards
increase exchange controls

Question 8

Economic risk

Answer 8

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

Question 8

Financial Risks

Answer 8

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

Question 9

How do they measure the country risk

Answer 9

PRS group scale:
International Country Risk Guide (ICRG)

Question 10

ICRG weights

Answer 10

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

Question 11

Risk Ratings- ICRG

Answer 11

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

• financial and economic risk is measured between 1-50

covers over 140 countries

Question 12

Political risk Components ICRG

Answer 12

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

Question 13

Economic risk Components ICRG

Answer 13

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

Question 14

Financial risk Components ICRG

Answer 14

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

Question 15

ICRG allows comps to:

Answer 15

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

Question 16

WB’s worldwide goverance indicators

Answer 16

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)

Question 17

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

Answer 17

voice and accountability
political stability

Question 18

WB Governace indicators
2.create sound economic policy

Answer 18

goverment efficiency
regulatory quality

Question 19

WB Governace indicators
3.Repsect of Rules

Answer 19

Rules of law
Control of corruption

Question 20

Soverign Risk

Answer 20

Goverment Defaults
solution: massive debt restrucutre/ Austerity

Question 21

austerity

Answer 21

goverment cuts on public debt through public spending

Question 22

Why is soverign debt such a problem

Answer 22

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

Question 23

Measures of sovering Risk

Answer 23

Soverign Credit Spread
CDS (Soverign default swaps
Soverign Credit Ratings

Question 24

Soverign Credit Spreads

Answer 24

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

Question 25

CDS

Answer 25

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

Question 26

CDS and Credit Spread advantages and disadvanatages

Answer 26

+ 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)

Question 27

SCR

Answer 27

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

Question 28

Soverign risk Spill over to corps: Channels

Answer 28

1. Financial 2. FISCAL 3. Other 4. Rating

Question 29

Sov risk Financial channel

Answer 29

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

Question 30

Sov risk Fiscal Channel

Answer 30

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

Question 31

Sov risk Other

Answer 31

Capital control Measures tax increase asset expropriation

Question 32

Sov risk Rating Channel

Answer 32

-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

Question 33

Impact of soverign risk for corp financing and investing

Answer 33

Capital structure investment cost of debt

Question 34

Managing country risk

Answer 34

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

Question 35

BIT

Answer 35

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

Question 36

BIT example UK-Colombia 03/2010

Answer 36

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

Question 37

Polticial Risk Insurance

Answer 37

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) -

Question 38

Covid 19 sover risk

Answer 38

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

Question 39

Across different countries, the pandemic affects sovereign risk differently.

Answer 39

high fiscal space countries affected less than low fiscal space