A company’s exposure to country risk should not be determined by where it is incorporated and traded, according to Aswath Damodaran (New York University—Stern School of Business) in a new paper. “By that measure, neither Coca-Cola nor Nestle are exposed to country risk,” he points out. Rather, he says, exposure to country risk should come from a company’s operations. Therefore, country risk is a “critical component of the valuation of almost every large multinational corporation.”
Damodaran’s paper, “Country Risk: Determinants, Measures and Implications - The 2015 Edition,” was recently posted on SSRN. It gives an overview of overall country risk (sources and measures), discusses sovereign default risk, and examines sovereign ratings and credit default swaps (CDS) as measures of that risk. He also takes a look at country risk from the perspective of equity investors by looking at equity risk premiums for different countries and consequences for valuation. Finally, he explains how to move across currencies in valuation and capital budgeting and how to avoid mismatching errors.
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