Country risk.

In plain English

Country risk is the set of risks that come from where an asset sits rather than what the asset is. It bundles political risk (elections, unrest, expropriation), currency risk (the local money weakening against yours), transfer risk (rules that stop money leaving), and sovereign risk (the government's own creditworthiness). A well-run company in a country with capital controls can still deliver a poor result to a foreign owner. Analysts usually express this as an extra return demanded on top of a base rate, which raises the discount rate applied to that country's cash flows and lowers what its assets are worth.

01Why it matters

It explains why two companies with nearly identical businesses can trade at very different prices, and why a diversified international fund spreads across many countries instead of concentrating in the one with the best growth story.

02The math, step by step

Say a project is expected to return 12 percent and your base required return is 8 percent. Add a 5 percent country risk premium and the hurdle becomes 13 percent, so the same project no longer clears. Nothing about the project changed, only the address.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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