political risk

Examples of political risk in the following topics:

• Political and legal risk in international business

  • Political and legal risks are two very important aspects of running a business of which an entrepreneur should be aware.
  • Political risk is generally defined as the risk to business interests resulting from political instability or political change.
  • Political risk exists in every country around the globe and varies in magnitude and type from country to country.
  • Companies can reduce their exposure to political risk by careful planning and monitoring political developments.
  • Governments may also offer political risk insurance to promote exports or economic development.

• What is legal risk?

  • Legal risk is the risk arising from failure to comply with statutory or regulatory obligations (http://www.ffiec.gov).
  • In order to minimize exposure to legal risks arising from confusion and excess cost, a company should seek legal advice if possible.
  • Shahira and her small business of running a sewing company faces different political and legal risk than those of a larger company, she is still liable and must understand the laws and regulations that she may face in any country.

• Political, Country, and Global Specific Risks

  • Political risk originates from government because a government can impose its authority over an enterprise's operations within a border or even outside its borders.
  • Political risk comes in many forms.
  • Although political risk can be difficult to predict, a country could exhibit characteristics that endangers investment.
  • Investors could face country risk that extends beyond political risk when they invest in a foreign country.
  • Multinational enterprises can use eight strategies to minimize political and country risk, which are:

• The Public Debt

  • A politically unstable state is anything but risk-free as it may cease its payments.
  • Another political risk is caused by external threats.
  • Treasury bonds denominated in U.S. dollars are often considered "risk free" in the U.S.
  • This disregards the risk to foreign purchasers of depreciation in the dollar relative to the lender's currency.
  • In addition, a risk-free status implicitly assumes the stability of the US government and its ability to continue repayments during any financial crisis.

• B2B Company Characteristics

  • Buying one can of soft drink involves little money, and thus little risk.
  • In international trade, delivery risks, exchange rate risks, and political risks exist and may affect the business relationship between buyer and seller.
  • Strong brands imply lower risk of using them; buying unfamiliar brands implies financial risks.
  • There exists a performance risk, as there might be something wrong with an unfamiliar brand.
  • Ultimately, a strong B2B brand will reduce the perceived risk for the buyer and help sell the brand.

• Measuring Country Risk

  • Thus, the investors and corporations must keep watching a country's ever changing political and economic conditions.
  • Thus, a country's risk reflects the negative influences of a country's economic and political environment.
  • Analysts would consider a country's historical stability and political turmoil.
  • Political Factors (PF) are grades of political stability.
  • This grade includes experts' opinions because analysts do not have good quantitative measures for political stability.

• Impact of Diversification on Risk and Return: Unsystematic Risk

  • In general, diversification can reduce risk without negatively impacting expected return.
  • In finance, systematic risk is the term associated with risk that can be diversified away by investing in a broader pool of assets.
  • The idea is that you can only diversify away so much risk, that the marginal returns on each new asset are decreasing, and each transaction has a cost in terms of a transaction fee and also research costs.
  • The risk that can be diversified away is called "unsystematic risk" or "diversifiable risk. "
  • They might decide Microsoft's stock is underpriced based on changing demographics to the labor supply in Seattle, or they might decide that political stability has improved emerging markets in Sub-Saharan Africa but the yield on their bonds hasn't taken that into account.

• The political/legal environment

  • The political/legal environment abroad is quite different from that of the US.
  • Business activity tends to grow and thrive when a nation is politically stable.
  • When a nation is politically unstable, multinational firms can still conduct business profitably.
  • While the concept of exchange rates appears relatively simple, these rates fluctuate widely and often, thus creating high risks for exporters and importers.

• Approaches to Assessing Risk

  • Since planned actions are subject to large cost and benefit risks, proper risk assessment and risk management for such actions are crucial to making them successful.
  • As risk carries so many different meanings, there are many formal methods used to assess or to "measure" risk.
  • In enterprise risk management, a risk is defined as a possible event or circumstance that can have negative influences on the enterprise in question.
  • In a financial institution, enterprise risk management is normally thought of as the combination of credit risk, interest rate risk or asset liability management, market risk, and operational risk.
  • In project management, risk management can include: planning how risk will be managed, assigning a risk officer, maintaining a database of live risks, and preparing risk mitigation plans.

• Information and Risk Trade-Off

  • IT risk relates to the business risk associated with the use, ownership, operation, involvement, and adoption of IT within an enterprise.
  • Risk is the product of the likelihood of an occurrence times its impact (Risk = Likelihood x Impact).
  • IT risk management can be viewed as a component of a wider enterprise risk management (ERM) system.
  • IT risk transverses all four of the aforementioned categories and should be managed within the framework of enterprise risk management.
  • Risk appetite and risk sensitivity of the whole enterprise should guide the IT risk management process.