Country Risk: Determinants, Measures and Implications – The 2016 Edition

103 Pages Posted: 21 Jul 2016

See all articles by Aswath Damodaran

Aswath Damodaran

New York University - Stern School of Business; New York University (NYU) - Leonard N. Stern School of Business

Date Written: July 14, 2016

Abstract

As companies and investors globalize, we are increasingly faced with estimation questions about the risk associated with this globalization. When investors invest in China Mobile, Infosys or Vale, they may be rewarded with higher returns but they are also exposed to additional risk. When Siemens and Apple push for growth in Asia and Latin America, they clearly are exposed to the political and economic turmoil that often characterize these markets. In practical terms, how, if at all, should we adjust for this additional risk? We will begin the paper with an overview of overall country risk, its sources and measures. We will continue with a discussion of sovereign default risk and examine sovereign ratings and credit default swaps (CDS) as measures of that risk. We will extend that discussion to look at country risk from the perspective of equity investors, by looking at equity risk premiums for different countries and consequences for valuation. In the final section, we will argue that a company’s exposure to country risk should not be determined by where it is incorporated and traded. By that measure, neither Coca Cola nor Nestle are exposed to country risk. Exposure to country risk should come from a company’s operations, making country risk a critical component of the valuation of almost every large multinational corporation. We will also look at how to move across currencies in valuation and capital budgeting, and how to avoid mismatching errors.

Suggested Citation

Damodaran, Aswath, Country Risk: Determinants, Measures and Implications – The 2016 Edition (July 14, 2016). Available at SSRN: https://ssrn.com/abstract=2812261 or http://dx.doi.org/10.2139/ssrn.2812261

Aswath Damodaran (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
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HOME PAGE: http://www.damodaran.com

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
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New York, NY NY 10012
United States

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