Explain the different types of risk and the reason of investment.

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 There are risks associated with investing in another country, yet many companies continue to do so.


For investors, political risk can be defined as the risk of financial and other losses due to changes that might occur in a country's government or regulatory environment expropriation of assets by a foreign government can have a devastating effect on share prices. Acts of war, terrorism, and military coups are all extreme examples of political risk. Other risks include exchange rate risk, economic risk and transfer risk (the risk of capital being locked up or frozen by government action). A company may choose to invest in another country despite such risks for a number of reasons.

Potential: The potential returns may appear to outweigh the risks involved.

Ease: Investing internationally can be a quick and effective way of boosting the performance of a corporate portfolio.

Country concerned: Country risk varies from one country to another and investment in those seen as having a low country risk (e.g. USA) might appear attractive.

Encouragement: Some governments may try to minimise the risk factors and give reassurances and incentives in order to attract inward investment.

Protection: Insurances can help reduce volatility and risk while attempting to protect capital and returns. Insurances can be relatively inexpensive and certain risks can be protected against.

Reassurance: Other factors such as pressures for increased shareholder return, competitor actions, professional advice from analysts and experts, etc. may be enough to encourage foreign investment in spite of the risks.

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