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

The expropriation of the firm's assets by the Italian government is an example of political risk, which refers to the potential for loss due to political actions such as nationalization, confiscation, and expropriation. Exchange rate risk refers to the potential for loss due to fluctuations in exchange rates, while market imperfections refer to distortions in a market that may cause inefficiencies. The fact that $100,000 equals €80,000 does not change the fact that the firm suffered a loss due to expropriation.

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