ECONOMICS

Detailed explanation-1: -Political risk is an important type of risk in an international capital budgeting context. This is explained by the fact that the political risk may happen if nations change their policies which might affect a business negatively for example the trade barriers.

Detailed explanation-2: -The major risk associated with foreign capital budgeting can be viewed in three ways; exchange rate fluctuation, political risk, and economic instability, specifically related to inflation. These factors can be predominant obstacles in multinational capital budgeting.

Detailed explanation-3: -Political risk is the possibility of a multinational company being significantly affected by political events in a host country or a change in the political relationships between a host country and one or more other countries.

Detailed explanation-4: -Thus, based on the scenarios, political risks can be divided into two types such as macro risks and micro risks. The macro risk is related to the multinational companies which have businesses in the country and the adverse effects faced by those companies.

Detailed explanation-5: -Risk analysis supports the investment decision by giving the investor a measure of the variance associated with an investment appraisal return estimate. Probabilistic method is not a substitute of Deterministic method but rather a tool that enhances its results.