Country Analysis

(i) Identify and discuss models used for assessing country risk.

Country risk defined as the country specific factors which adversely affect the returns of the investor. These can be separated into three classifications namely; political risk, economic risk and financial system risk. The main models used to assess country risk are numerical and qualitative in nature. However, these main categories have strengths and some draw-backs in assessing country risk. Numerical in nature usually stated as quantitative analysis which includes calculations of figures in their assessment. Qualitative analysis assesses risk based on individual perceptions which are subjective in nature.

Quantitative analysis make of use of ratios and statistics to determine risk, such as the debt-to-GDP ratio for a given country. This implies that this model compute ratio of a country debt against the value of gross domestic product which regarded as a measure of economic growth. Then make some comparisons of countries under assessment of the country risk. International investors can find this information in reports from ratings agencies, magazines like the Economist, and through various online sources. This model clearly indicates the ability of a country to finance its debt, therefore, it enables investors to have a strong predictive power in anticipating their returns. However, these numerical values does not give other factors of concern such as political stability which might have a strong adverse relationship with better returns in contrast with what might be portrayed by quantitative results.

Qualitative analysis makes use of subjective analysis to determine risk, such as breaking political news and opinion or realistic market rumors. International investors can also find this information in financial publications like the Economist and by searching on international news aggregators like Google News. This main model of assessing covers the weakness of quantitative analysis....