Professional Documents
Culture Documents
Kevin Kim
z5060289
Tutor: Marius
QUESTIONS
1. How
would
you
compare
Iceland
and
Venezuelas
corruption
1.There exists a drastic difference in corruption levels between Iceland and Venezuela.
Legal restrictions in Iceland are far more restrictive on businesses, whereas these laws
arent regularly enforced in Venezuela, leading to an environment conducive to
corruption. However, the insurance of organisations internal shareholder rights and the
disclosure of price altering information ensure the economys health in Iceland.
The
guaranteeing
minimum
rights
of
shareholders
(International
Business
Publications 2008). For instance, any deviation to the document such as the Articles of
Association requires an approval of shareholders. It creates liquidity in the market as
firms disclose information, improving Icelands position in the corruption index above that
of Venezuela.
2.A governments political decisions may have adverse effects on the profitability of an
investment action. Venezuela experiences high political risk as a result of an inconsistent
implementation of government policies. However, Icelands strict enforcement of
government policies assisted in minimising such risk. In order to reduce political risk, it is
essential to monitor and measure the political risk factors. The comparison of political
risk factors of both countries concludes that Venezuela experiences higher political risk
than Iceland.
Iceland experiences less political risk due to the enforcement of capital controls, resulting
from the Icelandic banking crisis in 2008(International Comparative Legal Guides 2015).
The legal structure of Iceland is stabilised by the imposition of governance regulations.
Despite low political risk, the risk still resides in Iceland. One example of political risk in
Iceland is the convenience of international business from the withdrawal from EU
membership without a public referendum (A.M. Best Company 2015).
In contrast, Venezuela is exposed to higher political risk due to the reigning socialist
government expropriation of privately owned enterprises and exchange controls. The
expropriations by the predecessor Hugo Chavez resulted in overflowing settlement
claims from foreign companies. One of the recent examples is the expropriation of Exxon
Valdez projects where only the book value was compensated. As a result, World Bank
Arbitration Tribunal Venezuela was forced to compensate US$1.6 billion in 2014
(Hanrahan 2014).
Furthermore, Venezuelan exchange controls prohibit acquisition of foreign currency. It is
due to the governments attempt to maintain an unsustainable currency rate, enhancing
the level of corruption. This resulted in deficits in foreign reserves and arbitrage
opportunities. Furthermore, leading importers to inflate goods values to fake shipments
and the low exchange rate (Neuman & Torres 2015).
Evidently, high political risk will harm the engagement of firms in FDI in Venezuela and
would require hedging. One method of mitigating the risk is to purchase negative beta
assets in the index of Venezuela. In doing so, the profitability increases in reverse to the
poor market performance, which can potentially occur. A possible drawback is that
investors must attentively select assets such as gold that guarantee a profit (Streissguth,
n.d).
Furthermore, investors will hedge the erosion of Venezuelan currency due to
hyperinflation. Hence, they forward hedge by borrowing Bolivars and invest in
instruments with stable returns. Similar to the negative beta asset method, a major
drawback is the possibility of making a loss. Therefore, investors must ensure that the
investments return exceeds the inflation rate to reserve their buying power
(Investopedia n.d.).
References
International Comparative Legal Guides 2015, Iceland Corporate Governance 2015, 2016
Global Legal Group, accessed 15 May 2016, http://www.iclg.co.uk/practiceareas/corporate-governance/corporate-governance-2015/iceland.
Moodys 2015, Moodys downgrades Venezuelas rating to Caa3 from Caa1; outlook
stable, Moodys Investors Service, accessed 15 May 2016,
https://www.moodys.com/research/Moodys-downgrades-Venezuelas-rating-to-Caa3-fromCaa1-outlook-stable--PR_315563.
Hanrahan, M 2014, Venezuela Ordered To Pay Exxon Mobil $1.6B Over Asset
Expropriation, International Business Times, accessed 16 May 2016,
http://www.ibtimes.com/venezuela-ordered-pay-exxon-mobil-16b-over-assetexpropriation-1702737.
International Business Publications 2008, Iceland Company Laws and Regulations
Handbook, 1st volume, International Business Publications, Washington D.C.
Egan, M 2013, Strong-Arm Policies Leave Venezuela Teetering on the Brink of Collapse,
Fox Business, accessed 16 May 2016,
http://www.foxbusiness.com/politics/2013/12/17/strong-arm-policies-leave-venezuelateetering-on-brink-collapse.html.
Streissguth, T n.d., Is a Negative Beta Coefficient More Risky Than a Positive in the Stock
Market?, accessed 17 May 2016, http://finance.zacks.com/negative-beta-coefficient-riskypositive-stock-market-7596.html.