Macro risk is a type of political risk that companies face when operating in foreign countries, including currency fluctuations and instability in the political system. Political risk insurance can help protect against financial loss.
Macro risk is a type of political risk that companies face when conducting operations in foreign countries. The increasing use of business technology has allowed companies to enter new foreign countries and expand their sales to numerous international economic markets. Many times, doing business in a foreign business environment is not the same as running a business in the United States. Furthermore, macro risks in a foreign country may not be the result of the current political system or trade policies.
A common form of macro risk is the fluctuating value of a foreign country’s currency. Currency fluctuations can occur for a variety of reasons, including the current monetary policy of the foreign country, the valuation of the currency by foreign markets, or significant changes in the value of the foreign country’s resources. Fluctuations in foreign currencies make it difficult for a US company to accurately fix the goods or services produced in the market of the foreign country. Companies may also face difficulties when trying to import or export goods produced in the foreign country, as currency fluctuations may not allow producing companies to make as much money by moving these items to a different country. Another type of macro risk can come from the instability of the current political system of the foreign country.
Many foreign countries are susceptible to rapid and significant changes in their political system. Countries that try to reach foreign investment when a free market for capitalist-style political party is in power may be left in a lurch if a fascist or socialist form of government takes control of the country’s political system. When this happens, US companies can face intense macro risk if the foreign country begins to take over private companies and nationalize their operations. Once a US company loses its foreign operations in the country, it may be subject to a significant write-off or financial loss on its financial statements. Companies trying to avoid this type of financial loss from macro risk may choose to purchase political risk insurance.
Political risk insurance helps companies reassure banks, lenders or private investors that they have taken precautions when starting operations in foreign countries. This form of business insurance can be purchased in different amounts or with specific stipulations that protect the company from financial loss due to macro risk. However, these insurance policies may not be available to certain foreign countries with extremely volatile political systems or to countries that cannot maintain a stable monetary valuation.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
