International Finance Multiple choice questions, finish within 30 mins
Student Lee 
ch061.ppt*
Multinational Financial Management
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COUNTRY RISK ANALYSIS
CHAPTER 6
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PART I. THE MEASUREMENT OF POLITICAL RISK
I. MEASURING POLITICAL RISK
A. Country-specific perspective
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THE MEASUREMENT OF POLITICAL RISK
B. Political Stability
1. Measured by:
a. Frequency of government changes
b. Level of violence
c. Number of armed insurrections
d. Conflict with other states
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THE MEASUREMENT OF POLITICAL RISK
C. Economic Factors
1. Indicators of political unrest
a. Rampant inflation
b. Balance of payment deficits
c. Slowed growth of per capita GDP
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THE MEASUREMENT OF POLITICAL RISK
D. Subjective Factors
1. Profit Opportunity Recommendation
2. Political Risk and Uncertain Property Rights
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THE MEASUREMENT OF POLITICAL RISK
3. Capital Flight
a. Definition:
the export of savings by a
nation’s citizens because of
safety-of-capital fears.
b. Measurement: use the
balance-of- payment account
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THE MEASUREMENT OF POLITICAL RISK
c. Causes of capital flight
1.) Inappropriate economic policies
2.) Expectation of devaluation
3.) High political risk
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PART II. ECONOMIC AND POLITICAL FACTORS
II. Economic and Political Factors Primary focus: How well is the country doing economically?
A. Fiscal Irresponsibility
-high government deficits
B. Monetary Instability
C. Controlled Exchange Rate System
-currency usually overvalued
D. Wasteful Government Spending
-inability to service foreign debt
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ECONOMIC AND POLITICAL FACTORS
D. Resource Base
-lack of strong work ethic
E. Country Risk and Adjustment to External Shocks
1. What are the impacts of external shocks:
-how well a nation responds varies
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ECONOMIC AND POLITICAL FACTORS
2. Key Indicators of Country Risk
a. Relative size of government debt
b. Money expansion
c. Existence of government- imposed barriers to market forces
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ECONOMIC AND POLITICAL FACTORS
2. Key Indicators of Country Risk (con’t)
d. Level of tax rates
e. Amount of government-owned firms
f. Political and fiscal responsibility
g. Amount and extent of corruption
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ECONOMIC AND POLITICAL FACTORS
Key indicators of economic health
a. Structural incentives
b. Legal structure
c. Clear incentives to save
d. Open economy
e. Stable macroeconomic policies
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PART III. COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKING
Country Risk and the Terms of Trade
What ultimately determines a nation’s ability to repay foreign loans?
- the speed of adjustment
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COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKING
The Government’s Cost/Benefit Calculus
- debt to wealth ratio
- cost of default
- fluctuations in the terms of trade
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COUNTRY RISK ANALYSIS IN INTERNATIONAL BANKING
Lessons from the International Debt Crisis of 1982
Economic reforms that work:
Strong head of state
Viable economic plan
Competent economic team
Support “at the top”
Sell the program to all levels of society
