AIM: Identify characteristics and guidelines leading to effective country risk analysis. Identify key indicators used by rating agencies to analyze a country’s debt and political risk, and describe challenges faced by country risk analysts in using external agency ratings.
Questions:
405.1. The following following four risk definitions are sometimes used interchangeably, as they are each associated with "country risk," but according to Wagner in fact have different meanings:
I. The risk that a foreign central bank will alter its foreign-exchange regulations, thereby significantly reducing or completely nullifying the value of foreign-exchange contracts. This also refers to the risk of government default on a loan made to it or guaranteed by it.
II. The risk that changes in a business environment that may adversely affect operating profits or the value of assets in a specific country. This also refers to the likelihood that a sovereign state may be unable or unwilling to fulfill its obligations toward one or more lenders.
III. This risk includes arbitrary or discriminatory actions taken by governments, political groups, or individuals that have an adverse impact on trade or investment transactions.
IV. This risk is associated with a unique profile that may includes one or more of country risk, sovereign risk, political risk and other risks (i.e., economic, financial, technical, environmental, developmental, and sociocultural).
Which is the correct mapping of terms to their respective definitions?
a. I = Sovereign risk, II = Country risk, III = Political risk, and IV = Transactional risk
b. I = Transactional risk, II = Political risk, III = Sovereign risk and IV = Country risk
c. I = Political risk, II = Transactional risk, III = Country risk and IV = Sovereign risk
d. I = Instability risk, II = Government risk, III = Country risk, and IV = Political risk
405.2. Peter is a new associate in the risk department of an international conglomerate. He is tasked to update the company's evaluation of country risk for a state in Eastern Europe. According to Wagner, which of the following approaches is probably best?
a. Learn, master and apply the logic of politics
b. Rely primarily on statistics issued by governments, or at the very least, multilateral organizations
c. Visit the country
d. Prioritize quantitative assessment (which are at least consistent) over qualitative assessments (which are subjective by definition)
405.3. According to Wagner, each of the following is fair critique, or criticism, of the use of external agency (credit) ratings to evaluate country risk, except which of the following is LEAST true, if not false?
a. Although there are several agencies utilizing range of quantitative and qualitative inputs, the patterns of their rating outputs are surprisingly similar; e.g., Greece before and after the Eurozone debt crisis that began materializing in 2008 (see http://en.wikipedia.org/wiki/Eurozone_crisis)
b. External agencies typically employ neither analytical methodologies nor comprehensive datasets; in most cases, they employ less data that an internal corporate staff performing its own country risk evaluation
c. The actual external rating may be largely based on a subjective interpretation of the data, and in that regard, a rating agency’s interpretive process may not be all that different from that utilized in a corporation
d. Assessing the risk of default in 5 or 10 years can be difficult and offer limited perceived value; yet ironically, given a long prediction horizon, external ratings are sometimes considered "too far behind the curve"
Answers here:
Questions:
405.1. The following following four risk definitions are sometimes used interchangeably, as they are each associated with "country risk," but according to Wagner in fact have different meanings:
I. The risk that a foreign central bank will alter its foreign-exchange regulations, thereby significantly reducing or completely nullifying the value of foreign-exchange contracts. This also refers to the risk of government default on a loan made to it or guaranteed by it.
II. The risk that changes in a business environment that may adversely affect operating profits or the value of assets in a specific country. This also refers to the likelihood that a sovereign state may be unable or unwilling to fulfill its obligations toward one or more lenders.
III. This risk includes arbitrary or discriminatory actions taken by governments, political groups, or individuals that have an adverse impact on trade or investment transactions.
IV. This risk is associated with a unique profile that may includes one or more of country risk, sovereign risk, political risk and other risks (i.e., economic, financial, technical, environmental, developmental, and sociocultural).
Which is the correct mapping of terms to their respective definitions?
a. I = Sovereign risk, II = Country risk, III = Political risk, and IV = Transactional risk
b. I = Transactional risk, II = Political risk, III = Sovereign risk and IV = Country risk
c. I = Political risk, II = Transactional risk, III = Country risk and IV = Sovereign risk
d. I = Instability risk, II = Government risk, III = Country risk, and IV = Political risk
405.2. Peter is a new associate in the risk department of an international conglomerate. He is tasked to update the company's evaluation of country risk for a state in Eastern Europe. According to Wagner, which of the following approaches is probably best?
a. Learn, master and apply the logic of politics
b. Rely primarily on statistics issued by governments, or at the very least, multilateral organizations
c. Visit the country
d. Prioritize quantitative assessment (which are at least consistent) over qualitative assessments (which are subjective by definition)
405.3. According to Wagner, each of the following is fair critique, or criticism, of the use of external agency (credit) ratings to evaluate country risk, except which of the following is LEAST true, if not false?
a. Although there are several agencies utilizing range of quantitative and qualitative inputs, the patterns of their rating outputs are surprisingly similar; e.g., Greece before and after the Eurozone debt crisis that began materializing in 2008 (see http://en.wikipedia.org/wiki/Eurozone_crisis)
b. External agencies typically employ neither analytical methodologies nor comprehensive datasets; in most cases, they employ less data that an internal corporate staff performing its own country risk evaluation
c. The actual external rating may be largely based on a subjective interpretation of the data, and in that regard, a rating agency’s interpretive process may not be all that different from that utilized in a corporation
d. Assessing the risk of default in 5 or 10 years can be difficult and offer limited perceived value; yet ironically, given a long prediction horizon, external ratings are sometimes considered "too far behind the curve"
Answers here:
