Lets assume, being a treasurer of a multinational company, you are conducting a preliminary country risk evaluation of some potential borrowers of two different countries. In this preliminary analysis, you are going to use only outside evaluation models. Briefly discuss how the outside evaluation models will give you some preliminary idea of your potential borrowers country risk. (1.5 marks)

Instructions: You may select two countries (can use the charts included in slides 13-15 of the Week 5 lecture note). Then, based on lecture 5 (all 3 outside evaluation methods), briefly discuss what decision you are going to make about the country risk of those two countries and justify your decision. Please focus on justifying your decision rather than explaining what these 3 methods are.

LECTURE SLIDES 13-15

The Euromoney Country Risk Index

Used to base on the spread of the required interest rate on a country's debt over LIBOR

Now an index based on a large number of economic and political factors.

Score = 0 = maximum risk Score=100 = no risk

- Tier 1 (80-100): Rating: AA to above

- Tier 2 (65-79.9): Rating: A- to AA

- Tier 3 (50-64.9): Rating: BB+ to A-

- Tier 4 (36-49.9): Rating: B- to BB+

- Tier 5 (0-35.9): Rating: D to B-

The Economist Intelligence Unit ratings:

A combined economic and political risk rating on a 100-point scale

Score=0 =norisk Score= 100 = maximum risk

Institutional Investor Index

Based on the scores given by the loan officers of major multinational banks surveyed

Example Another Student

As a treasurer of a multinational company evaluating potential borrowers from Switzerland and Italy, I can use outside evaluation models to provide a preliminary idea of the potential borrowers country risk and how likely those countries may be to default or reschedule their loan. The Euromoney Country Risk Index (ECRI), shown in Table 1, gives Switzerland a score of 90.30 and a tier one rating of AA or higher while Italy has a rating of 71.20 and a tier two ranting of A- to AA. The Economists Intelligence Unit (EIU) ratings, shown in Table 2, EIU gives Switzerland a score around 16 while Italy has a score around 40. The Institutional Investor Index (III), shown in Table 3, gives Switzerland a score of 95.9 while Italy has a score of 66.8. From these ratings, I can see that Switzerland is a very low risk country. It has the best rating on the EIU and III, and the second-best rating on the ECRI. I find that Italy is a low risk country, with it having the ninth best ECRI rating, the thirteenth best EIU rating and the twenty-second best III rating.