Deck 14: Country and Political Risk

Question 1

Which one of the following is a method to minimize the chance that political risk events will adversely affect the firm?

A) focus on the long term
B) rely on common available supplies
C) use local resources
D) refuse to bargain with the government

Answer 1

C

Question 2

The Overseas Private Investment Corporation (OPIC)offers coverage against

A) the event the importer does not pay.
B) losses due to labor strife.
C) the devaluation of a country's currency.
D) losses due to expropriation, political violence, and currency inconvertibility.

Answer 2

D

Question 3

Political risk is ________ and does not require a discount rate adjustment when forecasting cash flows.

A) diversifiable
B) not diversifiable
C) difficult to quantify
D) the same as financial risk

Answer 3

A

Question 4

Which one of the following historical events made country risk analysis an important part of international banking?

A) the 1973 oil crisis
B) the 1996 Mexican peso crisis
C) the 2006 Bolivian government's expropriation of gas fields
D) the 1980 debt crisis

Question 5

________ is the risk that a government action will negatively affect a company's cash flows.

A) Political risk
B) Economic risk
C) Social risk
D) Expropriation

Question 6

Which one of the following actions represents the most extreme form of political risk to a multinational firm?

A) expropriation
B) embargo
C) currency controls
D) protective tariffs

Question 7

________ are assessments of political and economic events produced by specialized organizations that that could aversely affect companies operating in a country.

A) Country risk premiums
B) Commercial risk ratings
C) Country risk ratings
D) Sovereign risk ratings

Question 8

Brady bonds were issued in 1989 in response to the Brady Plan in which the

A) debt of developing countries was securitized into easily tradable bonds.
B) countries agreed to change their economic policies following guidelines set by the UMF in exchange for new loans to developing countries.
C) repayment of debts from developing countries were severely restricted.
D) debts of developing countries were exchanged in debt-equity swaps.

Question 9

MNCs can purchase political risk insurance from

A) both public and private sector insurers.
B) public sector insurers only.
C) private sector insurers only.
D) central banks in the country where they are headquartered.

Question 10

________ is the name given the difference between the yield on a bond issued by a developing country in a currency and the government bond yield of the country that issues the currency.

A) The banking spread
B) The country risk premium
C) The country risk rating
D) The country credit spread

Question 11

What is the name of the type of insurance that can be purchased in the event a government may move against an exporter?

A) credit risk insurance
B) political risk insurance
C) commercial risk insurance
D) sovereign risk insurance

Question 12

Which one of the following economic variables would be the best to use to help investors determine a financially sound country?

A) the ratio of family debt to income
B) the ratio of a country's external debt to its GDP
C) a country's rate of HIV contamination
D) a country's foreign direct investment by other countries

Question 13

________ are the name of treaties that have helped investors avoid legal problems associated with sovereign debt.

A) Bilateral trade treaties
B) Bilateral investment treaties
C) Free trade zone treaties
D) Currency union treaties

Question 14

Country risk is broader than political risk because it includes the adverse ________ of operating in a country.

A) social and psychological risks
B) business risks
C) interest rate risk
D) political and economic risks

Question 15

When the government of a country may possibly default on its bond payments to outside investors,the risk is referred to as

A) political risk.
B) nationalization risk.
C) sovereign risk.
D) business risk.

Question 16

Political risk is the risk that a ________ will negatively affect a company's cash flows.

A) company's management error
B) government action
C) labor strike
D) recession

Question 17

________ are bonds issued by countries in response to the Plan in which the principal and some initial interest payments are collateralized.

A) Brady bonds
B) Baker bonds
C) Buybacks
D) Discount bond exchanges

Question 18

Which one of the following is the name for the action of a country takes when it repays a loan at a discount?

A) debt buyback
B) discount bond exchange
C) par bond exchange
D) conversion bonds

Question 19

________ is a broad concept that encompasses political risk and its economic and financial environment.

A) Expropriation
B) Nationalization
C) Country risk
D) Economic risk

Question 20

The Baker Plan of 1985 is named for the U.S.________.

A) secretary of state
B) president
C) federal reserve chair
D) treasury secretary

Question 21

Which one of the following places an MNC at the most risk?

A) protective tariffs
B) doing business in countries with inconvertible currencies
C) currency controls
D) currency boards

Question 22

Suppose you are the Minister of Labor in Brazil and your government is proposing to raise the minimum wage to raise the income of the poorer workers and thereby offset the effects of other economic policies that man adversely impact them.Others in the cabinet are concerned about the effects of the policy will have on employment and competitiveness.What is your response to them?

Question 23

The Baker Plan of 1985 is most associated with

A) the 1973 oil crisis.
B) the 1996 Mexican peso crisis.
C) the 2006 Bolivian government's expropriation of gas fields.
D) the 1980 debt crisis.

Question 24

What is the difference between political risk and sovereign risk?

Question 25

The discount rate in capital budgeting need not be adjusted for political risk.Agree or disagree and explain why.

Question 26

How might a government budget deficit lead to inflation?

Question 27

What are some indicators of country health?

Question 28

Which one of the following is the best advice for the MNC that wants to structure an investment so as to minimize the chance that political risk events will adversely affect the firm?

A) focus on the long term
B) rely on common available supplies
C) use local resources
D) refuse to bargain with the government

Question 29

A country's credit spread is another indicator of

A) sovereign risk.
B) commercial risk.
C) political risk.
D) credit risk.

Question 30

What political realities underlie a government budget deficit?

Question 31

Which one of the following do MNCs use to lower the cost of their investment into a country?

A) foreign bond markets
B) international banks
C) debt-equity swaps
D) long-term forward contracts