Suppose your firm invests $100,000 in a project in Italy.At the time the exchange rate is $1.25 = €1.00.One year later the exchange rate is the same,but the Italian government has expropriated your firm's assets paying only €80,000 in compensation.This is an example of
A)exchange rate risk.
B)political risk.
C)market imperfections.
D)none of the above, since $100,000 = €80,000 * $1.25/€1.00

Question

Quizplus · Accepted Answer

This is an example of political risk, which is the risk of loss due to political actions, such as government expropriation or nationalization, in a foreign country. While there was no exchange rate risk in this scenario, as the exchange rate remained constant, there was a loss due to political actions taken by the government.

Suppose Your Firm Invests $100,000 in a Project in Italy