FIN320 - 10

The likelihood that unexpected events within a host country will influence a customer's or government's ability to repay a loan.

• - Sovereign risk
• - Foreign exchange risk

The acceptability of the transaction for the culture of the lending institution

Seller of goods or services usually allow the buyer a grace period for making payment.

Where such time is not allowed by sellers, banks may give a loan (trade finance) to enable the buyer to make immediate payment to the seller.

Checklist approach

Delphi technique 

Quantitative analysis 

Inspection visits 

(a combination of these)

Prepare list of various political and financial factors that contribute to assessment of country risk.

There is no standard.

Banks may devise their own or use a similar checklist.

Seeking the views independently rather than through a group discussion

(bank may survey employees of various consulting firms)

Assessing various characteristics that influence country risk and running a regression

The country risk assessment team visits the country and meets government officials, company executives and even consumers to get their perspectives and then form a suitable opinion.

Economic structure and stability

Macroeconomic policy flexibility

Political risk

Transit risk

Credit risk

Foreign exchange risk

Transfer risk

Risk that the merchandise may get lost, damaged or stolen during transit and may not reach the destination.

Adequate marine insurance is required to cover these risks and it is valid during the transit period.

(Natural disasters, sinking, fire, piracy)

The exporter is exposed to default risk - especially when dealing with an importer with whom they have not had any previous dealings.

Includes insolvency of the importer, fraud and an unwillingness to accept goods by the importer.

Transaction in the domestic currency of the exporter = no risk for exporter, risk borne by importer (vice-versa)

Risk can be covered by forward contracts

Where a transaction is entered in a foreign currency, issues can arise where the buyer's country may impose restrictions that payment must be made in domestic currency only.

Economic conditions may deteriorate rapidly and the country may impose exchange controls.