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Economic Risk
In every organization, economic risk, or also known as forecast risk, refers to the possibility that macroeconomic conditions will influence an investment, especially in a foreign country (Investing Answers, n.d.). Some examples of the macroeconomic conditions are exchange rates, government regulations, or political stability. When financing an investment or a project, a company’s operating costs, debt obligations, and other economically unsustainable circumstances should be thoroughly calculated in order to produce adequate revenues in covering those investment costs (Ready Ratios, n.d.). For instance, when an American company invests money in a manufacturing plant in Spain, there are certain economic risks that influence the outcomes and values of the investment. Hypothetically, the political government in Spain might shift instantly that negatively impact the American company’s ability in operating the plant, such as changing laws or even seizing the plant. In this situation, the economic risks can be hyperinflation and exchange rate fluctuations, which lead to immensely expensive rates to pay workers’ salaries. Thus, the risks might unable the American company to move its profits out of Spain. As a result, all possible risks that outweigh an investment’s profits and outcomes need to be closely scrutinized and strategically planned before initiating the investment. Some examples of potential economic risks can be steep market downturns, unexpected cost overruns, and low demand for goods.

International investments are associated with significantly higher economic risk levels as compared to domestic investments. In international firms, economic risk heavily affects not only investors but also bondholders and shareholders, especially when dealing with sale and purchase foreign government bonds. Despite of the risky outcomes, economic risk can tremendously elevate the opportunities and profits for investors globally. When investing in foreign bonds, investors can gain high profits due to the fluctuation of the foreign exchange markets and interest rates in different countries (Ready Ratios, n.d.). Although, investors should always be analytical in calculating the possible changes made by the foreign regulatory authorities. Changing laws and regulations on sizes, types, timing, credit quality, and disclosures of bonds will immediately and directly affect the investments in foreign countries. For example, if a central bank in a foreign country raises interest rates or the legislature increases taxes, the investment will be significantly influenced. As a result, economic risk can be reduced by utilizing various analytical and predictive tools that consider the diversification of time, exchange rates, and economic development in multiple countries, which offer different currencies, instruments, and industries.

To develop a comprehensive analysis of an economic forecast, several risk factors should be noted. One of the most effective strategies is to develop a set of positive and negative risks that associate with the standard economic metrics of an investment (Dye, 2017). In a macroeconomic model, a few main risks are GDP levers, exchange rate fluctuations, and commodity prices and stock market fluctuations. On the other hand, it is equally critical to identify the stability and volatility of the market economic system. Before initiating an investment, consider the stability of the investing sector that influence the exchange rate reactions. For instance, a service sector is less likely to have inventory swings and exchange rate reaction as compared to a large consumer sector.

Reference

Dye, R. A. (2017, January 2). Assessing economic risk factors. ''International Banker. '' Retrieved fromhttps://internationalbanker.com/finance/assessing-economic-risk-factors/

Investing Answers (n.d.). Economic risk. Retrieved from https://investinganswers.com/financial- dictionary/economics/economic-risk-2918

Ready Ratios (n.d.). Economic risk. Retrieved from https://www.readyratios.com/reference/analysis/economic_risk.html