Transfer risk is the risk that a non-sovereign entity, which is able and willing to service its foreign currency obligations, cannot obtain the required currency or cannot transfer this money to the receiver abroad. This transfer inability is caused by the imposition of restrictions on convertibility or capital transfers by the government. Transfer risk applies to all types of international investments, especially in emerging market countries. Due to this, it is more important than ever in these days of globalization. The New Basel Capital Accords require the consideration of transfer risk, too.
The author Philipp Hauger describes the different types of risk occurring in international borrowings and investments. The political and corporate determinants of transfer risk are examined. The book illustrates the reasons why monetary unions reduce the risk of a transfer event, even though they have no influence on the sovereign risk. In addition, the author details how transfer risk is assessed by international professionals and describes two interesting approaches to estimate transfer risk in a quantitative way.
This book is intended for professionals and students who are interested in the risks of international investments and for everybody working in international business, who has to differentiate between sovereign risk and the risk of a corporate default.
Table of Contents
- 1 Introduction
- 2 Types of Risk in International Capital Transactions
- 2.1 Default Risk
- 2.1.1 Corporate Default Risk
- 2.1.2 Sovereign Default Risk
- 2.2 Country Risk
- 2.2.1 Political Country Risk
- 2.2.2 Economic Country Risk
- 2.2.3 Social Country Risk
- 2.3 Rating Implications
- 2.3.1 Historical Application of the Sovereign Ceiling
- 2.3.2 Local versus Foreign Currency Ratings
- 2.3.3 Transfer and Convertibility Risk Ratings
- 2.1 Default Risk
- 3 Determinants of Transfer Risk
- 3.1 Political Determinants
- 3.2 Corporate Determinants
- 4 Empirical Examples of Transfer Risk Determinants
- 4.1 Influence of Monetary Unions
- 4.1.1 European (Economic and) Monetary Union
- 4.1.2 Central African Economic and Monetary Community
- 4.1.3 Common Monetary Area
- 4.1.4 Adoption of a foreign currency and currency board
- 4.2 Sovereign Crises with and without Transfer Events
- 4.2.1 Venezuela (1994)
- 4.2.2 Dominican Republic (2005)
- 4.1 Influence of Monetary Unions
- 5 External Assessments of Transfer Risk
- 5.1 Assessment by Political Risk Insurers
- 5.2 Regulatory Assessment of Transfer Risk
- 6 Quantifying Transfer Risk
- 6.1 Monte Carlo Simulation
- 6.2 Merton Approach
- 7 Summary
Objectives and Key Themes
This master's thesis aims to analyze transfer risk in international lending, comparing it to sovereign risk. It explores the determinants of transfer risk, examines empirical examples, and investigates methods for quantifying this risk.
- Definition and differentiation of transfer risk from other international financial risks.
- Analysis of the determinants of transfer risk, including political and corporate factors.
- Examination of the impact of monetary unions on transfer risk.
- Case studies of sovereign crises illustrating transfer risk events.
- Methods for assessing and quantifying transfer risk.
Chapter Summaries
1 Introduction: This chapter introduces the concept of transfer risk in international lending, explaining it as the risk that a borrower, despite having the ability and willingness to service its debt, cannot convert and transfer the necessary foreign currency to the creditor due to government-imposed restrictions. The two-stage process of international lending is illustrated, highlighting the distinct nature of transfer risk as a separate stage from the earning of sufficient domestic currency.
2 Types of Risk in International Capital Transactions: This chapter provides a comprehensive overview of various risks involved in international capital transactions. It begins by differentiating between default risk (corporate and sovereign) and country risk (political, economic, and social). It then delves into the implications of these risks for credit ratings, focusing particularly on the historical application of sovereign ceilings, the distinctions between local and foreign currency ratings, and the specific assessment of transfer and convertibility risk in ratings systems. The chapter builds a framework for understanding how transfer risk fits into the broader landscape of international finance risks.
3 Determinants of Transfer Risk: This chapter investigates the key factors that influence transfer risk. It meticulously examines both political determinants, such as government policies and political stability, and corporate determinants, such as the borrower's financial strength and the nature of its operations. The analysis will likely explore how these factors interact to create a complex web of influences on a country's propensity to restrict currency transfers. This lays the groundwork for understanding the multifaceted nature of this risk and for the prediction of potential occurrences.
4 Empirical Examples of Transfer Risk Determinants: This chapter provides real-world examples to illustrate the theoretical framework established in previous chapters. It analyzes the influence of monetary unions (European Monetary Union, Central African Economic and Monetary Community, Common Monetary Area, and the adoption of foreign currencies) on transfer risk and then examines case studies of sovereign crises with and without transfer events. Specific examples of Venezuela (1994) and the Dominican Republic (2005) will showcase how political and economic factors interact to trigger or prevent transfer crises. These examples provide valuable empirical evidence and context for the theoretical discussions presented earlier.
5 External Assessments of Transfer Risk: This chapter explores how external entities evaluate and assess transfer risk. It examines the methodologies and approaches used by political risk insurers and regulatory bodies in assessing this crucial aspect of international finance. The examination of these differing viewpoints will likely highlight the strengths and weaknesses of various assessment methods. This chapter provides a critical perspective on how transfer risk is currently managed and assessed in the practical world.
6 Quantifying Transfer Risk: This chapter focuses on the methodological approaches to quantify transfer risk. It examines two distinct approaches: Monte Carlo simulation and the Merton approach. These quantitative methods offer tools for better understanding and potentially predicting the likelihood of transfer risk events. By providing a quantitative lens through which to view the otherwise qualitative nature of transfer risk, this chapter provides important tools for financial risk management.
Keywords
Transfer risk, sovereign risk, country risk, default risk, international finance, credit ratings, monetary unions, sovereign crises, risk quantification, Monte Carlo simulation, Merton approach, political risk, economic risk.
Frequently Asked Questions: Master's Thesis on Transfer Risk in International Lending
What is the main topic of this master's thesis?
This master's thesis analyzes transfer risk in international lending, comparing it to sovereign risk. It explores the determinants of transfer risk, examines empirical examples, and investigates methods for quantifying this risk.
What is transfer risk?
Transfer risk is the risk that a borrower, despite having the ability and willingness to service its debt, cannot convert and transfer the necessary foreign currency to the creditor due to government-imposed restrictions. It's a distinct risk from the borrower's ability to earn the domestic currency needed to repay the loan.
What types of risk are discussed in relation to transfer risk?
The thesis discusses several types of risk, including default risk (corporate and sovereign), country risk (political, economic, and social), and transfer risk. It explains how these risks relate to each other and impact credit ratings.
What are the determinants of transfer risk?
The thesis examines both political determinants (government policies, political stability) and corporate determinants (borrower's financial strength, nature of operations) of transfer risk. It explores how these factors interact to influence a country's propensity to restrict currency transfers.
What is the role of monetary unions in influencing transfer risk?
The thesis analyzes the impact of monetary unions (like the European Monetary Union, Central African Economic and Monetary Community, and others) on transfer risk. It explores how the adoption of a common currency or a foreign currency can affect the likelihood of transfer restrictions.
What case studies are included in the thesis?
The thesis includes case studies of sovereign crises with and without transfer events, specifically examining Venezuela (1994) and the Dominican Republic (2005) to illustrate how political and economic factors can trigger or prevent transfer crises.
How is transfer risk assessed and quantified?
The thesis explores external assessments of transfer risk by political risk insurers and regulatory bodies. It also examines quantitative methods for assessing transfer risk, including Monte Carlo simulation and the Merton approach.
What are the key chapters of the thesis?
The thesis includes chapters on Introduction, Types of Risk in International Capital Transactions, Determinants of Transfer Risk, Empirical Examples of Transfer Risk Determinants, External Assessments of Transfer Risk, Quantifying Transfer Risk, and a Summary.
What are the key words associated with the thesis?
Key words include: Transfer risk, sovereign risk, country risk, default risk, international finance, credit ratings, monetary unions, sovereign crises, risk quantification, Monte Carlo simulation, Merton approach, political risk, economic risk.
What is the overall objective of the thesis?
The thesis aims to provide a comprehensive analysis of transfer risk in international lending, differentiating it from other risks, exploring its determinants, examining real-world examples, and proposing methods for its quantification.
- Quote paper
- Master of Science (MSc) Philipp Hauger (Author), 2006, An Analysis of Transfer Risk in Comparison to Sovereign Risk, Munich, GRIN Verlag, https://www.grin.com/document/62752
