An Empirical Analysis of the Relationships between Currency Risk, Country Development, and Country Location

The relationship between currency exchange rate risk and country risk, country development, and country geographic location are examined. Using a sample of 52 countries over the period from 1991 through 1995, results indicate that those countries with relatively high levels of country risk experience relatively high levels of currency risk. This finding supports the argument that those underlying factors that drive country risk seem also to have an influence on currency exchange risk. Results of this analysis also indicate that industrialized countries typically experience higher currency risk, as do countries located in the Western Hemisphere of the world. However, these observed relationships are virtually non-existent in the later sup-period (from 1993 to 1995) when compared to the earlier sub-period of time (from 1991 ti 1993). Multinational firms would find this new information on international risk relationships useful when developing currency and country risk-control strategies