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REFLECTION
Political risk is broadly described as the danger to commercial interests posed by political
instability or change. Political risk exists in every country and varies in size and nature from one to the
next. Political risks can arise from policy changes by governments to change controls imposed on
exchange rates and interest rates. Furthermore, political risks can arise from legitimate government
actions such as price controls, output controls, activity controls, and currency and remittance
restrictions. Political risk can also arise from events beyond the authority of the government, such as
war, revolution, terrorism, labor strikes, and extortion. Political risk can have a major influence on every
area of international business, from the ability to export or import goods to the ability to own or operate
an organization.
Political risks are classified as either general or specialized. Systemic risk refers to adverse
political conditions that affect all foreign countries and investments in each country in which they
operate; while unsystematic risk refers to the likelihood of adverse political acts affecting only a certain
sector, firm, or project. There are various subtypes, such as credit or default risk. This is the risk that a
corporation or individual will be unable to meet its contractual interest or principal commitments on its
debt obligations. Country risk is the risk that a country will be unable to meet its financial obligations.
Foreign exchange risk is the risk that an overseas financial transaction will face as a result of currency
volatility. The danger of interest rate rises during the period of debt securities is known as interest rate
risk. Political risk is the financial risk that a country's government would change its policies
unexpectedly. Market risk is the risk that an individual or other entity will suffer losses as a result of
variables affecting the overall performance of the market. There are three categories of political risk:
political/economic environment risk, domestic economic conditions, and external economic relations.
These political risks can be reduced by in-depth political risk analysis, negotiation with the host country,
and political risk insurance. There are causes of international disputes, and these include
ideological differences, national integrity, territorial claims, national prestige, unlimited colonialism, and
liberation movements. These can be solved by the kinds of settlements available. There are three
primary legal systems in the world, including common law, in which judges' decisions, known as
