Money, Banking, and International Financeglobalization. Protestors are angry over the loss of jobs and increased competition with other
countries. Finally, a cyber attack is similar to protests against governments and corporations.
Governments and business enterprises use large networks of computer systems to store the data.
Computer hackers can break into these computer systems and steal or destroy the data.
Environmental issues create a global risk because environmental regulations and programs
raise a business’s costs. Hence, a business could relocate to countries with weak environmental
laws, such as China to reduce its production costs. Then the enterprises could pollute more while
some of the pollution drifts to other countries through the air and water.
Many corporations implemented corporate responsibility to appease the protestors and
critics. Consequently, corporations claim they do more than earn profits; they benefit the
communities where they operate. They claim they improve the social, environmental, and
economic conditions that surround the business. For example, Starbucks pays a greater market
price for coffee because the company wants to help the small struggling coffee farmers in third
world countries. Of course, Starbucks advertises this activity, enhancing its image.
Measuring Country Risk
Firms investing in foreign markets are exposed to a risk associated with that country. Thus,
the investors and corporations must keep watching a country’s ever changing political and
economic conditions. For instance, voters had elected socialists or nationalists into a
government that begins seizing property. Consequently, the value of foreign investment and
foreign assets could plummet in value as international investors and businesses flee the country.
After the people had elected Hugo Chavez as president in Venezuela, his government began
nationalizing industries, causing an exodus of foreign capital. Furthermore, a government could
weaken property rights or impose new taxes on foreign businesses. Finally, the Russian debt
crisis in 1998 and Argentina's international loan default in 2002 triggered the rapid decline of
Russian and Argentina's assets after both crises.
International investors, buying foreign bonds, can experience a currency exchange rate risk,
an interest-rate risk, a borrower default, and/or a country risk. An investor experiences an
exchange rate risk because a country’s exchange rates are constantly fluctuating, changing an
investment’s value. For example, an investor's investment would greatly plummet in value if a
country's currency had depreciated greatly.
For an interest-rate risk, investors observe the interest rate rises as the bond's market price
falls. Therefore, the market value of a bond investment decreases. Furthermore, the bondholders
do not earn the greater interest rate because they have already purchased the bonds and locked in
an interest rate.
Investors protect themselves from credit risk by increasing the borrower’s interest rate.
Consequently, the interest rate is comprised of the risk-free interest rate and risk premium. Risk-
free interest rate reflects the market interest rate with a zero default rate. For instance, the
investors consider U.S. government securities to be risk free because the U.S. government has
never defaulted on its debt, or at least not yet. However, many investors are becoming alarmed
after the U.S. government debt surpassed $17 trillion during 2013. Investors believe the U.S.
government debt is risk-free because the U.S. government can increase taxes or print money to