Suppose your firm invests $$100,000$ in a project in Italy. At the time the exchange rate is $$1\mathrm{.}25=1\mathrm{.}00.$ One year later the exchange rate is the same, but the Italian government has expropriated your firm's assets paying only $80,000$ in compensation. This is an example of

Multiple Choice

market imperfections.

exchange rate risk.

none of the options, since $$100,000=80,000$$$\frac{1\mathrm{.}25}{}1\mathrm{.}00$

political risk.