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

An analyst compares two emerging economies. Country A earns most of its export income from one commodity, while Country B has diversified exports across many goods and services. Other factors are equal. Which conclusion is most consistent with the determinants of country risk?

Country A has higher country risk. Heavy dependence on one commodity links its export income, government revenue, currency and growth to a single volatile price, so a price decline can trigger a crisis. Diversified exports in Country B spread this exposure and reduce vulnerability.

  1. ACountry A has higher country risk because its economy is more exposed to commodity price swingsCorrect
  2. BCountry B has higher country risk because diversification increases volatility
  3. CBoth have equal risk because export mix does not matter
  4. DCountry A has lower risk because a single commodity makes cash flows predictable

Explanation

Commodity dependence ties government revenue, currency and growth to one price, increasing volatility and the chance of crisis when prices fall. Diversification reduces this exposure, so Country B is less risky, not more. Predictability of one commodity's price is not a feature of commodity markets.

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