In “Country Risk”, a chapter published in The Guide to Damages in International Arbitration, Tiago Duarte-SIlva explores the difficult task of assessing how an asset’s value is affected by its location in a foreign country. This effect, known as country risk, is a reflection of the potentially adverse effects of the political, economic and financial risks of operating in a country.
There are a wide variety of approaches to measure country risk, mainly concentrated in adjustments to the discounted cash flow method of valuation. As the various approaches to measure country risk may often lead to different results, the correct approach or approaches must be chosen with due care. This chapter lays out how investors account for country risk in their valuations, and how it should be incorporated in damages calculations.