Question

Suppose your firm invests $100,000 in a project in Italy. At the time the exchange rate is $1.25 = €1.00. One year later the exchange rate is the same, but the Italian government has expropriated your firm's assets paying only €80,000 in compensation. This is an example of _______

Answer 1

Answer:

political risk.

Explanation:

political risk: This is risk or changes in government policy that adversely affect the fortune of companies operating in a country. Since Italian government expropriated the company paid only €80,000  as again €125,000 that the company worth. The company has suffered political risk.

Exchange rate risk or currency risk: It is a risk arising from frequent changes in exchange rate or amount in which a country's currency can be exchange for another currency. Since exchange rate remain the same i.e.  $1.25 = €1.00, exchange rate risk did not occurred.