FRM Part I · FRM Exam Part I · Country Risk: Determinants, Measures, and Implications
A firm earns 60% of its revenue in Country X (CRP 6.0%) and 40% in a mature market (CRP 0%). The mature-market ERP is 5.0%. Using a revenue-weighted exposure to country risk, what ERP should be applied to the firm?
The ERP to apply is 8.6%. The firm's revenue-weighted country risk premium is 60% × 6.0% plus 40% × 0%, or 3.6%, which is added to the 5.0% mature-market premium. Using the operating exposure rather than country of incorporation avoids overstating risk.
- A8.6%Correct
- B11.0%
- C7.0%
- D5.0%
Explanation
Weighted CRP = 0.6 x 6.0% + 0.4 x 0% = 3.6%. ERP = 5.0% + 3.6% = 8.6%. Using the full 6.0% gives 11.0%, ignoring operational exposure; 5.0% ignores the CRP.
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