Macro Risk

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Offline Md. Al-Amin

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Macro Risk
« on: April 02, 2014, 12:31:11 PM »
Macro Risk

Macro risk is the risk that the political activity in a country will affect the operations of foreign companies that do business in that country.

How it works/Example:

For example, let's say the government of the country of Cyprus is facing a fiscal crisis and decides to seize a portion of all the money in bank accounts held in the country. If American company Company XYZ does business in Cyprus and has a bank account there, some of its assets are therefore subject to the whims of the Cyprus government. In fact, any company doing business in Cyprus probably has a bank account there and thus faces this risk of seized assets. Accordingly, the crisis in Cyprus isn't contained to Cyprus -- it represents macro risk because it has ramifications for businesses around the world.

Why it Matters:

Macro risk is a major factor for international businesses, and thus it influences stock returns and portfolio strategy in turn. Macro risk is also a major factor in currency valuation.

It is important to note that macro risk is not always within a foreign government's control. Situations such as war, natural disaster or crop-destroying weather also can create macro risk.