Los 16.d Flashcards
(7 cards)
What are the three types of geopolitical risk?
Geopolitical risk refers to events that can disrupt peaceful international relations. It can be classified into three types:
Event risk: Events with a known timing but an uncertain outcome, such as national elections.
Exogenous risk: Unanticipated events like wars or rebellions.
Thematic risk: Long-term, known factors like human migration patterns or cyber risks.
How does geopolitical risk affect investment values?
Geopolitical risk can influence investment values by increasing or decreasing the risk premium investors require to hold assets in a particular country or region. To forecast the effect on investments, we need to consider:
The probability (likelihood) of the event.
The magnitude (impact) of its effect on investment outcomes.
The velocity (speed) with which investment values will reflect these effects.
How does the framework of cooperation and globalization help estimate geopolitical risk?
The framework of cooperation and globalization helps estimate the likelihood of geopolitical risk. Generally:
More cooperative and globalized countries tend to have a lower likelihood of risks like armed conflict, but may face higher risks such as supply chain disruptions (e.g., the COVID-19 pandemic).
Less cooperative or less globalized countries may face higher geopolitical risks, but this varies based on the country’s level of engagement in international affairs.
What are the three broad categories of tools used in geopolitics?
National Security Tools: Includes armed conflict, espionage, and agreements designed to prevent or reinforce armed conflict. These tools can be active (currently in use) or threatened (potential future use).
Economic Tools: Can be either cooperative (e.g., free trade areas, economic unions) or noncooperative (e.g., domestic content requirements, nationalization).
Financial Tools: Involves foreign investment and currency exchange, either in a cooperative (open to foreign investment, free currency exchange) or noncooperative (restrictive) manner e.g. sanctions
How do investors assess the impact of geopolitical risk on investments?
Investors should consider whether the geopolitical risk will have discrete impacts (affecting a specific company or industry) or broad impacts (affecting a country, region, or the world). They should focus on risks that could have a high impact, particularly during recessions when these risks may have greater effects on investment values.
What types of analysis can investors use to assess the effects of geopolitical risks?
Investors can use qualitative or quantitative scenario analysis to gauge the potential effects of geopolitical risks on their portfolios, helping them understand how these risks may unfold.
