This website uses cookies to ensure you have the best experience. Learn more

Risk Management Essay

5175 words - 21 pages

Chapter Sixteen
Sovereign Risk
Solutions for End-of-Chapter Questions and Problems: Chapter Sixteen

1. What risks are incurred when making loans to borrowers based in foreign countries? Explain.

When making loans to borrowers in foreign countries, two risks need to be considered. First, the credit risk of the project needs to be examined to determine the ability of the borrower to repay the money. This analysis is based strictly on the economic viability of the project and is similar in all countries. Second, unlike domestic loans, creditors are exposed to sovereign risk. Sovereign risk is defined as the uncertainty associated with the likelihood that the host government may not make ...view middle of the document...

Even though bondholders usually appoint trustees to look after their interests, it has proven to be much more difficult to approve renegotiation agreements with bondholders in contrast to bank syndicates.

b) The group of banks that dominate lending in international markets is limited and hence able to form a cohesive group. This enables them to act in a unified manner against potential defaults by countries.

c) Many international loans, especially those made in the post-war period, contain cross-default clauses, which make the cost of default very expensive to borrowers. Defaulting on a loan would trigger default clauses on all loans with such clauses, preventing borrowers from selectively defaulting on a few loans.

d) In the case of post-war loans, governments were reluctant to allow banks to fail. This meant that they would also be actively involved in the rescheduling process by either directly providing subsidies to prevent repudiations or providing incentives to international agencies like the IMF and World Bank to provide other forms of grants and aid.

4. What two country risk assessment models are available to investors? How is each model compiled?

The Euromoney Index was originally published as the spread of the Euromarket interest rate for a particular country’s debt over LIBOR. The index was adjusted for volume and maturity. The index recently has been replaced by a large number of subjectively determined economic and political factors.

The Institutional Investor Index is based on surveys of the loan officers of major multinational banks who subjectively give estimates of the credit quality of given countries. The scores range from 0 for certain default to 100 for no probability of default.

5. What types of variables normally are used in a CRA Z-score model? Define the following ratios, and explain how each is interpreted in assessing the probability of rescheduling.

The models typically use micro- and macroeconomic variables that are considered important in explaining the probability of a country’s credit rescheduling.

a. Debt service ratio. The debt service ratio (DSR) divides interest plus amortization on debt by exports. Because interest and debt payments normally are paid in hard currencies generated by exports, a larger ratio is interpreted as a positive signal of a pending debt rescheduling possibility.

b. Import ratio. The import ratio (IR) divides total imports by total foreign exchange reserves. A growing amount of imports relative to FX reserves indicates a greater probability of credit restructuring. This ratio is positively related to debt rescheduling.

c. Investment ratio. The investment ratio (INVR) measures the investment in real or productive assets relative to gross national productive. A larger investment ratio is considered a signal that the country will be less likely to require rescheduling in the future because of increased productivity; thus...

Other Papers Like Risk Management

Management Risk Essay

2188 words - 9 pages of risk. Risk Management Before a risk management strategy can be decided upon, the risk event must first be identified. An organisation should conduct three steps before deciding on the best risk management strategy to use. As risk management can use a substantial amount of resources, clarification and direction should be decided upon before conducting risk management. The three factors are (Stanleigh, 2015); * Identification of the risk

Risk Management Essay

4553 words - 19 pages IMT 4762 Risk Management 1 Report Police Group: Sumanth Ramanujapuram Vinay Krishna Vemuri Deming Yin 27.9.2013 1 0. Executive Summary As  we  have  been reviewing the current situation of Skyri police,  the duties and tasks of Skyri police fall into the following categories: ● Develop effective collaborative solutions with other operators and service providers. ● Coordination  of  the  goals,  plans  and  work  of   the  regional

Risk Management

1055 words - 5 pages Risk Management Student Name Institution Risk Management for a Satellite Development Project When a project manager talks about a project risk management plan, what comes in the participant mind? The list and document that have a number of foreseeable risk, estimated level of impacts as well as the established responses to issues. This establish the risk assessment matrix which help to assess the level of impact as it occur. The risk

Risk Management

1428 words - 6 pages  Risk Management Dattatreya Shodhan SU200173813 Strayer University CIS527 Dr.  Glenn Hines 10/14/15 Abstract Risk Management is one of the major components for a company to be successful as if it

Risk Management - 1257 words

1257 words - 6 pages Running Head: RISK MANAGEMENT Risk Management Jennifer Sprague HCS 451- Health Care Quality Management and Outcomes Analysis May 16, 2011 Isamel Caicedo When looking at organizations and the risks that they have to manage on a daily basis, we see where policies, procedures, and outcomes come into play. Though risks are different and challenge organizations in different ways, there are steps that every organization

Risk Management - 1482 words

1482 words - 6 pages Risk Management /562 December 8, Risk Management Risk management is the practice that identifies the potential risk before the risk becomes a problem. Risk management will allow an organization to take the necessary steps to reduce or prevent the risk from becoming a major problem for an organization (The Economic Times, 2012). Risk management will also include identifying the various risk of an organization within a risk assessment, to

Risk Management - 3866 words

3866 words - 16 pages CHAPTER ONE 1.0 INTRODUCTION Project management is the application of knowledge, skills, tools, and techniques to project activities in order to meet or exceed stakeholder needs and expectations from a project. Project risk management includes the processes concerned with identifying, analyzing, and responding to project risk. It includes maximizing the results of positive events and minimizing the consequences of adverse events

Risk Management - 4934 words

4934 words - 20 pages Discuss the principles and objectives of Risk Management from the perspectives of both company directors and Auditors, explaining how you consider the appropriate assessment and prioritisation of recognised and documented risks could have possibly have prevents or minimised the impact of any of the recent prominent corporate failures worldwide. Table of Content

Risk Management - 675 words

675 words - 3 pages Using the information asset valuation/impact evaluation method presented in chapter 8, conduct a preliminary risk assessment of the organization’s critical information. Answer each of the questions covered in the chapter. What would it cost if the organization lost all of their data? [Insert Answers Here] The cost would honestly be potential loss of human life, therefore Billions. 1. What is risk management? A process that identifies

Risk Management - 748 words

748 words - 3 pages Risk  Management     1-­‐A     Likelihood     Banking  Risk:   The  Likelihood  of  a  break  in  at  Macville  café  I  think  is  in  the  possible   category.  It’s  not  extremely  high  but  with  the  banking  not  been  done   regularly  enough  because  of  the  distance  to  the  bank  from

Risk Management - 4636 words

4636 words - 19 pages Risk Management in Islamic and Conventional Banks: A Differential Analysis Salman Ahmed Shaikh* Dr. Amanat Ali Jalbani Abstract Islamic banking is interest-free banking which makes it necessary for Islamic banks to take active part in the operations of the business, i.e. share profits as well as losses. Banks including Islamic banks prefer to take minimum risk. On the surface, it may seem that Islamic banks face more risk and hence, will

Related Essays

Risk Management Essay 2497 Words

2497 words - 10 pages Introduction of Risk Management Risk management is a culture which involved of the cooperation of all individual in the organization or group. The main achievement of risk management is not to discuss how the risk can be managed or prepare, but, more important, is to understand why the risks need to be managed and why it is so important. There are many techniques, tools, guidelines or processes to assist risk managers to manage risks. However

Risk Management Essay 1244 Words

1244 words - 5 pages Risk is a commonly used term and its usually liked with bad impacts on our objectives. The Oxford English Dictionary define risk as “ a chance or possibility of danger, loss, injury or other adverse consequences”. There is no agreeable technical definition of risk as it went through many developments. The first stage was the management of threats only then the term is extended to cover the threats and the opportunities which face the

Risk Management Essay 2511 Words

2511 words - 11 pages Impact of Risk Management in Application Development Abstract: Nowadays, software is becoming a major part of enterprise business. Software development is activity connected with advanced technology and high level of knowledge. Risks on software development projects must be successfully mitigated to produce successful software systems. Lack of a defined approach to risk management is one of the common causes for project

Risk Management Essay 1196 Words

1196 words - 5 pages RISK MANAGEMENT Background The future of an organization can be affected by my many things. The negative things are called risks while the positive ones are called opportunities. Risk Management is needed in any organization today than ever before. In the past, many organization were either not aware or ignored risks or worse all lived through the unfortunate consequences caused by them. In many cases, there were no designated persons