AIMs: Explain key considerations when developing and using analytical tools to assess country risk. Describe a process for generating a ranking system and selecting risk management tools to compare the risk among countries.
Questions:
407.1. About the creation of a risk management framework for country risk assessment, Wagner advises each of the following as true, EXCEPT which does he not assert?
a. Any adopted tools or installed systems must be simple and easy to use, in order to encourage their broad acceptance and avoid encouraging or exacerbating common pitfalls
b. Broad indicators are more likely to produce greater variance and error, while more narrowly focused indicators may be more accurate, but for a limited context of problems
c. Two basic sets of steps are involved in deciding whether to proceed with a trade or investment transaction: first, devise a general risk management framework, and, second, apply a country risk management process
d. Country risk is a new field without many tools and indicators. Consequently, a country risk tool should strive to include all (as many as possible, at least) of the available indicators and variables "in order to maximize the fact pattern"
407.2. In regard to the use of country risk indicators, which of the following is TRUE according to Wagner?
a. China currently has a greater working age population than India which implies, ceteris paribus, that China a more desirable investment
b. In considering whether to do business in China or India, a good and simple first step in the inquiry is to examine each country’s history in attracting FDI
c. India currently has a lower GDP per capita than China (on this indicator "India is about where China was 10 years ago") which implies India is not a good investment destination
d. Similar to the observed phenomena in agency credit ratings for corporate bonds, countries ratings and rankings tend to be highly consistent across country risk information providers
407.3. Wagner suggests a country classification by number and color: "A good place to start is to create a common platform for classifying all the countries where you may be doing business, and an easy way to do that is simply to categorize them by number and color, based on a composite of information sources. You may wish to subscribe to several information providers, create a weight for their rankings (which allows for comparison), and assign a number corresponding to a color for them, per Figure 28 [i.e.. Green zone= 100 to 88 and red zone = 57 and below], which uses green/higher numbers to identify countries of lower risk and red/lower numbers to show higher risk. Using a color-coded system also helps communicate the level of risk in a universally understood manner."
He proposes each of the following questions (parameters)--the answer to which of "Yes" suggests the country may need to be listed as RED--except for which is NOT a suggested "red zone" indicator?
a. Is the total public debt as a percentage of gross domestic product (total debt-to-GDP) in excess of 100%?
b. Is the country known to lack compliance with international law?
c. Are there any outstanding embargoes imposed by the United Nations or individual states?
d. Is travel prohibited to or from that country; if so, by whom and why?
Answers here:
Questions:
407.1. About the creation of a risk management framework for country risk assessment, Wagner advises each of the following as true, EXCEPT which does he not assert?
a. Any adopted tools or installed systems must be simple and easy to use, in order to encourage their broad acceptance and avoid encouraging or exacerbating common pitfalls
b. Broad indicators are more likely to produce greater variance and error, while more narrowly focused indicators may be more accurate, but for a limited context of problems
c. Two basic sets of steps are involved in deciding whether to proceed with a trade or investment transaction: first, devise a general risk management framework, and, second, apply a country risk management process
d. Country risk is a new field without many tools and indicators. Consequently, a country risk tool should strive to include all (as many as possible, at least) of the available indicators and variables "in order to maximize the fact pattern"
407.2. In regard to the use of country risk indicators, which of the following is TRUE according to Wagner?
a. China currently has a greater working age population than India which implies, ceteris paribus, that China a more desirable investment
b. In considering whether to do business in China or India, a good and simple first step in the inquiry is to examine each country’s history in attracting FDI
c. India currently has a lower GDP per capita than China (on this indicator "India is about where China was 10 years ago") which implies India is not a good investment destination
d. Similar to the observed phenomena in agency credit ratings for corporate bonds, countries ratings and rankings tend to be highly consistent across country risk information providers
407.3. Wagner suggests a country classification by number and color: "A good place to start is to create a common platform for classifying all the countries where you may be doing business, and an easy way to do that is simply to categorize them by number and color, based on a composite of information sources. You may wish to subscribe to several information providers, create a weight for their rankings (which allows for comparison), and assign a number corresponding to a color for them, per Figure 28 [i.e.. Green zone= 100 to 88 and red zone = 57 and below], which uses green/higher numbers to identify countries of lower risk and red/lower numbers to show higher risk. Using a color-coded system also helps communicate the level of risk in a universally understood manner."
He proposes each of the following questions (parameters)--the answer to which of "Yes" suggests the country may need to be listed as RED--except for which is NOT a suggested "red zone" indicator?
a. Is the total public debt as a percentage of gross domestic product (total debt-to-GDP) in excess of 100%?
b. Is the country known to lack compliance with international law?
c. Are there any outstanding embargoes imposed by the United Nations or individual states?
d. Is travel prohibited to or from that country; if so, by whom and why?
Answers here:
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