Country Risk/Sovereign Risk
Some countries still interfere (i.e. limit supply of currency available) with the natural market mechanisms of the forex markets. Such interference could affect a currency in a number of different ways including the liquidity of the currency. If significant enough the trader may not be able to receive a rightful payment. Country risk is most acute with the so called “exotics.”
Study Guide >> Forex Trading Risks >> Country Risk
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Example-
A U.S. businessman who conducts business in Europe decides to purchase an historic office building for his business and renovate it, but he finds out after he purchases it that it will cost him five times as much money to complete the renovation project as estimated because of the historic significance his building holds in the community and the onerous building requirements imposed by the local property-guardian bureaucracy. In short, he doesn’t have enough Euros to complete the renovations to the specifications required by the local government. He must exchange more dollars than he had anticipated. This is an example of: Country risk
These historic property protection laws are different from country to country. Some countries have them, some don’t. Some are more onerous than others. As an American, it is very likely that he was unaware of such a law (and how arbitrarily they can be applied from one area to another).
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