Internation Risk quiz 1

Risk vs. Uncertainty Definition

Risk means you can calculate the exact probabilities of future outcomes using data. Uncertainty means you cannot calculate or measure the outcomes because you lack data or precedent.

Transaction Exposure Definition

The risk of actual cash loss on a settled contract (like an unpaid foreign currency invoice) when exchange rates change before cash is collected.

Translation Exposure Definition

An accounting risk where converting a foreign subsidiary's financial statements into the parent company's home currency causes paper gains or losses on consolidated reports without immediate cash flow impact.

Economic Exposure Definition

The long-term risk that exchange rate shifts permanently weaken a firm's future cash flows, pricing power, and global competitive advantage.

Creeping Expropriation Definition

When a government uses gradual regulations, high fees, or strict mandates to strip away a foreign firm's profits and control without officially seizing property title.

Direct Expropriation Definition

The formal, sudden takeover of foreign-owned physical property or businesses by a host government, usually without fair market compensation.

Sovereign Risk Definition

The risk that a foreign government defaults on its own national debt obligations or stops paying international bondholders.

Operating / Regulatory Risk Definition

The risk that host-country policy changes, price caps, or administrative delays harm daily operations and shrink business profit margins.

Digital Localization Laws

Rules forcing foreign companies to store and process local customer data on servers inside the host country, raising IP theft and government monitoring risks.

Wholly-Owned Greenfield Subsidiary

Building a new operation from scratch with 100% equity ownership, offering maximum IP protection and operational control at the highest capital cost.

Licensing Agreement Entry Mode

Contracting a local firm to produce goods using your intellectual property in exchange for royalties, minimizing capital risk but exposing IP to theft in weak legal systems.

Joint Venture (JV) Strategy

Creating a new company jointly owned with a local partner to satisfy foreign ownership laws and share costs, though it requires sharing managerial control.

Secondary Sanctions & Dollar Clearing

A regulatory power (especially in the U.S.) that penalizes foreign banks doing business with blocked entities simply because the transaction uses domestic currency clearing networks (like USD clearing).

Political Risk Insurance (PRI)

Insurance (from agencies like MIGA) covering non-commercial losses from war, expropriation, and currency convertibility blocks, but never normal commercial losses like recessions.

Operational Hedging

Reducing foreign exchange risk by matching costs and revenues in the exact same foreign currency (e.g., building plants where you sell products).

Local Financing Strategy

Lowering political and currency convertibility risk by borrowing local currency from host-country banks to fund local operations

Macro vs. Micro Political Risk

Macro political risk affects every business in a country (like a nationwide tax rate increase). Micro political risk targets only specific industries or foreign companies (like price caps placed only on foreign telecom firms).

Natural Operational Hedging Mechanics

Locating factories or buying supplies in the same foreign country where you sell products naturally matches your costs and revenues in the same currency, protecting long-term profits without using financial contracts.

Jurisdiction via USD Clearing

Foreign banks and companies become subject to U.S. sanctions law whenever a transaction processes through U.S. dollar clearing accounts, even if neither party is based in the U.S.

Borrowing Host Country Currency

Funding local projects by borrowing local money from host-country banks protects your home capital if the local currency crashes or the host government blocks fund transfers out of the country

Scenario: Long-Term Currency Shift & Production Move

A U.S. firm sees Euro strength shrinking European sales. They open a factory in Germany, paying worker wages and buying steel in Euros. What risk is managed and how?

Scenario: Overseas Bank Handling USD Transactions

A French bank helps an Iranian company transfer funds, but the transaction passes through a clearing bank in New York in U.S. Dollars. Why can U.S. regulators penalize the French bank?

Scenario: Host Country Currency Collapse & Local Debt

A foreign subsidiary in an unstable country funds a factory expansion by taking a loan from a local bank in local currency rather than taking a U.S. Dollar loan from head office. How does this protect the parent firm?

Scenario: Government Passes Rules on Foreign Mining Firms

A host nation raises taxes for all companies by 2%, but passes strict new local-management requirements only for foreign-owned copper mines. What types of political risk are present?

Scenario: Strict Ownership Caps & Strong Legal Protections

An MNE enters a country that legally limits foreign ownership to 49%, but has reliable, foreign-enforced courts. What entry strategy protects capital while keeping legal compliance?

Case Study: Google News in Spain

Spain passed a law requiring news aggregators to pay a mandatory fee to publishers for article snippets. Google shut down Google News in Spain, demonstrating how micro-political regulatory risk can make local operations unviable.

Case Study: McDonald's Russia Exit

Strict Western economic sanctions blocked global payment systems and disrupted supply lines, creating legal compliance issues and forcing McDonald's to completely sell its Russian operations.

Political Risk Assessment (ICRG)

The International Country Risk Guide (ICRG) measures and ranks countries based on financial, political, and economic stability to help businesses assess risk before entering a market.

Political Risk Insurance (PRI) & MIGA

Insurance provided by agencies like MIGA (World Bank) that transfers non-commercial risks—such as war, physical expropriation, and currency conversion blocks—away from the investor.

Currency Inconvertibility & Transfer Restrictions

A regulatory risk where a host government bans foreign companies from converting local profits into foreign currency or sending money back to home headquarters.

Primary vs. Secondary Sanctions

Primary sanctions stop domestic citizens/firms from trading with blocked targets. Secondary sanctions penalize foreign companies that trade with targeted entities by cutting off their access to U.S. markets or bank