{"id":55790,"date":"2014-08-11T07:47:26","date_gmt":"2014-08-11T11:47:26","guid":{"rendered":"http:\/\/countingpips.com\/?p=55790"},"modified":"2014-08-11T08:12:47","modified_gmt":"2014-08-11T12:12:47","slug":"political-risk-in-the-currency-markets","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2014\/08\/political-risk-in-the-currency-markets\/","title":{"rendered":"Political Risk in the Currency Markets"},"content":{"rendered":"
August 11, 2014<\/div>
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Article by ForexTime<\/a><\/strong><\/p>\n

Political risk is a factor that can generate uncertainty and can directly or indirectly effect investments on a global basis.\u00a0 The risks can create significant volatility, which needs to be mitigated to some extent to allow an investor to focus on profit potential.\u00a0 By obtaining protection against the possible losses created from political actions, an investor can focus their attention on returns.<\/p>\n

Political risk can hinder the ability of a portfolio to perform, but can also have an indirect effect on a portfolio by creating headwinds for lenders, borrowers, and intermediaries.\u00a0 There a number of institutions that can assist in the protection of political risk beyond issuing specific credit risk contracts such as credit default swaps.\u00a0 The most prolific insurers of political risk are the re-insurance companies.<\/p>\n

Sectors Susceptible to Political Risk<\/b><\/p>\n

The sovereign interest rate markets are generally considered the most susceptible to political risk.\u00a0 As seen in the recent European sovereign debt crisis, the whims of governments can generate substantial volatility within the interest rate markets.<\/p>\n

Currency markets, which reflect capital market flows, are also very susceptible to political instability.\u00a0 A currency can devalue when a government is in trouble, devaluing all of the assets that are priced in that currency, creating liquidation in values for outside investors.\u00a0 Interest rates and currencies are generally highly correlated which means that political risk can create systemic issues for an investor.<\/p>

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Companies that have mobile asset that are in developing countries are often susceptible to political risks.\u00a0 The effects of a political risk event can be severe with consequences isolated to the loss of the value of the assets, or representing a more integral part of the company\u2019s business. Political risks can also result from actions such as refusal to issue an export license where it was previously available, or cancellation or termination of a valid license that a corporation had already procured.<\/p>\n

Emerging Markets<\/b><\/p>\n

Companies with long-term investments in overseas emerging markets are vulnerable to political risks.\u00a0 These risks may occur without warning, and can occur from a number of sources in many different forms. Although governments of emerging markets are not as likely to directly penalize investors on purpose, they generally focus on the short term results which can lead to a devaluation of their asset base.<\/p>\n

Issues such as changes in the ruling political party can lead to more stringent policies for foreign direct investors.\u00a0 A focus on domestic issues can lead to and anti-Western sentiments.\u00a0 Changes in the foreign policy of the corporation\u2019s home country towards the host country could result in the loss of an investments value.<\/p>\n

There have been historical situations in which a foreign government has purposely nationalized equity investments without remuneration to the investor.\u00a0 \u00a0\u00a0New legislation with discriminatory acts against a specific western company or all western companies in the local country can create severe negative ramification to a company.\u00a0 Trade embargoes and sanctions enacted by a government can be detrimental.<\/p>\n

Issues for Lenders<\/b><\/p>\n

The cross-border lending business is often hamstrung in pursuing transactions that are restrictions to country exposure mandated by regulatory agencies or internal bank guidelines.\u00a0 Issues such as the freezing of bank deposits by the host government, the inability to convert local currency into hard currency and inability to transfer funds from the host country following the implementation of host government restrictions, can be detrimental toward an active lending business.<\/p>\n

Repayment risks can be faced by lenders is there is outright confiscation of the borrower property or investments by the government.\u00a0 Political violence such as terrorism or civil strife may be the direct and immediate cause of default.<\/p>\n

Risk Mitigation<\/b><\/p>\n

Specific types of political risk can be hedged, in a way that is similar to a credit default swap.\u00a0 For example, a re-insurer might generate a swap in which there is a specific notional payout if an event occurs.\u00a0 In the case where a government collapses or an assets is nationalized the investor looking for a hedge will be protected if an event occurs.\u00a0 These binary events are similar to weather hedges, which protect investor from specific one off incidents.The cost of this type of hedging makes insurance products a luxury that is geared toward the institutional investor or bank lender, as opposed to the retail investor.<\/p>\n

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\"Forex-Time-Logo\"Article by ForexTime<\/a><\/span><\/strong><\/p>\n

ForexTime Ltd (FXTM)<\/strong> is an award winning international online forex broker regulated by CySEC 185\/12 www.forextime.com<\/a><\/p>\n

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Article by ForexTime Political risk is a factor that can generate uncertainty and can directly or indirectly effect investments on a global basis.\u00a0 The risks can create significant volatility, which needs to be mitigated to some extent to allow an investor to focus on profit potential.\u00a0 By obtaining protection against the possible losses created from […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-55790","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/55790","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=55790"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/55790\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=55790"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=55790"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=55790"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}