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
A. Exchange rate risk
B. Political risk
C. Market imperfections
D. None of the above, since $100,000 = €80,000×$1.25/€1.00
Answer:B
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
A. Exchange rate risk B. Political risk C. Market imperfections D. None of the above, since $100,000 = €80,000×$1.25/€1.00