Question

_____25. Which of the following would ordinarily be classified as a political risk?

a. a change in the exchange rate

b. price competition from a government owned competitor

c. government approval of a competitor's investment in the same market

d. government requirement to switch the purchase of materials from an imported to a domestic source,

Answer 1

Answer 25). (d). government requirment to switch the purchase of materials from an imported to a domastic source.

The political risk is when due to political instability or political changes which impacts the returns from the investment. In this case the government starts purchasing the materials from the domestic source instead of imported source. This is generally associated with the local product safety. Thus in order to protect domestic market the government switches from imported source to domestic source. Thus this becomes riskier for the investor from abroad due to some political reason.