Imagine you are an investor, a government, a trader, a company — and you have ten billion dollars to invest.
Economic Risk What it is: Economic risk is the chance that macroeconomic conditions like exchange rates, government regulation, or political stability will affect an investmentusually one in a foreign country. How it works Example: Aside from the business risk associated with making the plant profitable, Company XYZ is exposed to economic risk.
The political environment could shift quickly, perhaps prompting the Congolese government to seize the plant or significantly change laws that affect Company XYZ's ability to operate the plant.
Likewise, hyperinflation could make it impossible to pay workers, or exchange rate circumstances could make it unprofitable to move profits out of the country. Economic risk is one reason international investing carries more risk than domestic investing.
Shareholders and bondholders often bear the economic risk undertaken by international companies like Company XYZ. Investors who purchase and sell foreign government bonds are also exposed. Economic risk may also add opportunity for investors. Foreign bondsfor example, allow investors to participate indirectly in the foreign exchange markets and the interest rate environments of different countries.
But the foreign regulatory authorities may impose different requirements on the types, sizes, timing, credit qualitydisclosures, and underwriting of bonds issued in their countries.
Economic risk can be mitigated by opting for international mutual funds because they provide instant diversificationoften investing in a variety of countries, instruments, currencies, or international industries.Political risk is the risk that a country will make political decisions that have adverse effects on corporate profits.
Learn about micro and macro risk. How important is an understanding of country risk for investors? Given the increasingly global nature of investment portfolios, we believe it is very important.
Our paper measures the economic content of five different measures of country risk: The International Country Risk Guide is political risk.
Political risk is a type of risk faced by investors, corporations, and governments that political decisions, events, or conditions will significantly affect the profitability of a business actor or the expected value of a given economic action. Political risk can be understood .
Economic risk is the chance that macroeconomic conditions like exchange rates, government regulation, or political stability will affect an investment, usually one in a foreign country. How it works (Example). This article addresses the economic content of five different measures of country risk: four measures from the International Country Risk Guide's political-, financial-, economic-, and composite-risk indexes and one from Institutional Investor's country credit ratings.
Political risk is the risk that an investment's returns could suffer as a result of political changes or instability in a country.