Page 213 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes These three factors, in turn, depend on a variety of factors and will vary with the time period and
the country being examined.
The next step is to assign values to the various sub-factors. For example, the economic factors can
be assigned value in such a manner that a score of 1 is very favourable, i.e., lowest risk whereas
a score of 5 is very unfavourable, i.e., highest risk (i.e., the range is from 1 to 5).
Favourable Unfavourable

1—————2——————3—————4———————5
Representing their degree of importance the economic factors are then assigned weights which
should add up to 100 per cent. The assigned values of the factor times their respective weight can
then be summed up to derive an economic risk rating. The process described for deriving the
economic risk rating is then repeated to derive both the political and social risk rating.
Once the three risk rating scores have been arrived at, a country’s overall country risk rating as
related to a specific project can be determined by assigning weights to the economic, political
and social ratings according to their perceived importance. The three weights must total to
100 per cent. The economic, political and social ratings multiplied by their respective weights
would determine the overall country risk rating for a country as related to a particular project.
Table 12.3 illustrates the country risk assessment for a hypothetical project in a proposed
hypothetical country. The number of relevant factors and the assignment of weights to the
factors as per their degree of importance, under each of the three categories, will vary with the
project being planned and the type of country being assessed. Then, the overall country risk
rating is determined. There are four economic factors, five political factors, and three social
factors that determine the overall country risk rating. Economic risk factor A might reflect the
quality of labour force, economic risk factor B internal economic growth, economic risk factor
C, investment on social infrastructure and so on. Political risk factor A might reflect the degree
of political tension within the country, political risk factor B the degree of political tension with
the neighbouring countries and so on. Social risk factor A might reflect the environment problems
and so on. Column I lists the three categories of factors—Economic Risk factors, Political Risk
factors and Social Risk factors. In Column 2, values are assigned to each factor within a range of
1 to 5 depending upon the risk perceived. Score 1 signifies lowest risk while score 5 signifies
highest risk. Column 3 assigns weights to each factor in accordance with their importance.
Column 4 determines the risk rating for each factor, which is arrived at by multiplying
column 2 with column 3.

Table 12.3: Country Risk Assessment

Column Risk Factors (1) (2) Rating Assigned (3) Weight Assigned (4) = (2) × (3)
to Factor to Factor as per Weighted value
Importance
Economic Risk Factor
Economic Factor A 2 20% .4
Economic Factor B 1 30% .3
Economic Factor C 1 40% .4
Economic Factor D 2 10% ..2
Economic Risk Rating 100% 1.3
Political Risk Factor
Political Factor A 1 10% .1
Political Factor B 2 10% .2
Contd...

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