Skip to content

FRM Part II · FRM Exam Part II · Country Risk: Determinants, Measures, and Implications

A credit officer reviews a corporate borrower whose revenues are in local currency, but whose debt is dollar-denominated, in a country whose sovereign rating has just been downgraded. Which implication for the corporate exposure is most appropriate?

The borrower's credit risk likely rises. A sovereign downgrade is associated with currency depreciation, possible capital controls and weaker domestic conditions, which make dollar-denominated debt costlier to service from local-currency revenues.

  1. AThe borrower's credit risk likely rises, because sovereign stress raises the chance of currency depreciation, capital controls and weaker domestic cash flows against its dollar debtCorrect
  2. BThe borrower's risk is unchanged, because corporate ratings are independent of sovereign ratings
  3. CThe borrower's risk falls, because depreciation lowers the value of its dollar debt
  4. DThe risk is relevant only to the sovereign's own bonds

Explanation

Sovereign downgrades tend to coincide with depreciation and transfer or convertibility risk, which raise the local-currency cost of servicing dollar debt. Corporates are often constrained by the sovereign ceiling, and depreciation increases, not reduces, the burden of foreign-currency debt.

Did you get it right without looking?

One question tells you little. A timed set on Country Risk: Determinants, Measures, and Implications shows your real accuracy, how long you take and where you lose marks.

Practise Country Risk: Determinants, Measures, and ImplicationsFree diagnostic mock

More Country Risk: Determinants, Measures, and Implications questions