summer 2018 exam 21Protected Vi Sa this PC Sign in ilings Re

summer 2018 exam 21-Protected Vi Sa this PC Sign in ilings Review View Add-ins H at want to do Country risk 1. A company is planning a project that must be located in a country that has a relatively high level of political risk. That is, there is a risk that after the company has made an investment in the project in the foreign country, the govenment may alter the regulatory environment to the disadvantage of the company. Identify and explain two things the company can do before beginning this project to reduce the political risk the project faces 2. Identify two sources of country risk that are not related to or caused by political risk

Solution

1. The two things that the company could do before starting the project to reduce the political risk are -

Understanding that though the political risk is difficult to manage and tackle at the entire economy level, one can surely mitigate the political risk at company level by taking an insurance policy. Insurance premium outflows will affect the business but also provide a safety net and assurance against the political risk. The second thing company could do is to constantly keep a check on the political events in that country and estimate its riskiness. It should understand that politcal risk cannot be 100% eliminated so the company has to have exit routes and other alternatives prepared and updated on regular basis. Also, company can go for offices in different countries with different political situations so that the political risk can be reduced through diversification.

2. Two sources of country risk apart from political risk are exchange rate risk and transfer risk. Transfer risk is the risk that the exchange rate restrictions would make it difficult to convert currency of the country in which the project takes place to the company\'s currency and vice versa. This would make it difficult to bring back the project earnings to the base country. Exchange rate risk is a financial risk that arises since the base country and project country are different - huge exchange losses might make the project a loss making one.