Learning Objectives: Identify and explain the different sources of country risk. Evaluate the methods for measuring country risk and discuss the limitations of using those methods. Compare and contrast foreign currency defaults and local currency defaults. Explain the consequences of a country’s default.
Questions:
24.9.1. Stan is evaluating an investment in a small country island country named Ibit. The nation is governed by a robust unelected leader who has held power for the past 15 years. A publication rated Ibit as a 44 after surveying 400 economists.
Given the information provided, what potential concern(s) should an investor be wary of and what publication most likely rated Ibit?
a. Continuous risk, Euromoney
b. Discontinuous risk, Euromoney
c. Continuous risk, The Economist
d. Discontinuous risk, The Economist
24.9.2. Jim is a wealthy citizen of Ibit and is not allowed to hold assets outside of his home country. Ibit is a small autocratic country that is currently burdened with high national debt at 9.5x GDP denominated in IBT (Ibit’s home currency).
As an investor, what is Jim’s primary risk, and how can he hedge this risk?
a. Inflation, by purchasing gold and other hard assets
b. Inflation, by purchasing Ibit debt
c. Deflation, by purchasing gold and other hard assets
d. Deflation, by purchasing Ibit debt
24.9.3. Jim is anticipating Ibit defaulting on its debt. What type of political risk has become more likely and what would be a smart investment if Jim cannot invest outside of Ibit?
a. Discontinuous risk, shorting bank equities
b. Continuous risk, holding cash
c. Increased risk of war, long equities
d. Risk of nationalization, long gold
Answers here:
Questions:
24.9.1. Stan is evaluating an investment in a small country island country named Ibit. The nation is governed by a robust unelected leader who has held power for the past 15 years. A publication rated Ibit as a 44 after surveying 400 economists.
Given the information provided, what potential concern(s) should an investor be wary of and what publication most likely rated Ibit?
a. Continuous risk, Euromoney
b. Discontinuous risk, Euromoney
c. Continuous risk, The Economist
d. Discontinuous risk, The Economist
24.9.2. Jim is a wealthy citizen of Ibit and is not allowed to hold assets outside of his home country. Ibit is a small autocratic country that is currently burdened with high national debt at 9.5x GDP denominated in IBT (Ibit’s home currency).
As an investor, what is Jim’s primary risk, and how can he hedge this risk?
a. Inflation, by purchasing gold and other hard assets
b. Inflation, by purchasing Ibit debt
c. Deflation, by purchasing gold and other hard assets
d. Deflation, by purchasing Ibit debt
24.9.3. Jim is anticipating Ibit defaulting on its debt. What type of political risk has become more likely and what would be a smart investment if Jim cannot invest outside of Ibit?
a. Discontinuous risk, shorting bank equities
b. Continuous risk, holding cash
c. Increased risk of war, long equities
d. Risk of nationalization, long gold
Answers here:
