What is a Country Risk?

Country risk has to do with various factors that can impact the level of risk associated with transactions originating in different countries. The type of transactions that carry some degree of country risk include currency exchange, stocks, bonds, and the extension of credit for purchases. It is not unusual for suppliers, brokers, and others who engage in trading and general business operations to assess the degree of country risk before proceeding with a transaction.

In terms of investing, country risk is often focused on the buying and selling of foreign stock. Foreign stocks are usually understood to be stock options that are associated with a corporation that is headquartered in a country other than the current home of the potential investor. Investors and brokers typically look at several different factors before determining the viability of buying shares of the stock, especially if the stock is not universally traded.

Along with the usual investigations into stock performance and history, it is not unusual for the potential for country risk to also be based on factors relating directly to the nation where the company resides. The current level of general economic stability is often addressed. At the same time, the political environment of the country will be taken into consideration. Even situations such as the geographical characteristics of the company may be evaluated as part of determining whether or not the level of risk is acceptable.

Bonds also carry a degree of country risk. This is especially true of foreign government bonds, where the political and economic conditions in the country may play a significant role in the ability of the government to honor the bonds. When there are indications that the economy is headed for a downturn, or the government is not as stable as it should be, there is a good chance that the amount of country risk will be unacceptable to the investor.

Country risk may also call for the examination of such factors as applicable laws that could impact the investment or transaction, cultural influences on the structure of common business practices within the country, and also the current rate of exchange of the nation’s currency on the open market. While just about any investment based in a country other than the nation of the investor carries some degree of risk, there are certainly some transactions that will carry more risk than others.