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International investment decisions involve committing financial resources across national boundaries with the objective of earning long-term returns. Such investments are exposed to a wide range of uncertainties arising from differences in economic, political, legal, financial, and cultural environments. Risk analysis is therefore an essential part of international financial management. It helps multinational companies evaluate the expected profitability of foreign projects while identifying and measuring the various risks that may affect future cash flows. Risk analysis in international investment decisions begins with the identification of all possible sources of risk. The first step is to estimate the expected cash inflows and outflows from the proposed foreign investment. These cash flows are projected over the life of the project based on market demand, production costs, taxation, financing costs, and expected economic conditions. The next step is the assessment of country risk. Country risk refers to the possibility that political, economic, or social events in the host country may adversely affect the investment. Political instability, government intervention, nationalization, expropriation, civil unrest, terrorism, ________ ____ __________ ____ ________ ________ ______ __________ _________.
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