H McKee Stewart Jr

Musings on Business, Finance, and Economcs.

Requests You Don’t Get Everyday

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From a finance oriented discussion group –

“Hi, Could someone help me identify the risk free rates, country risk and beta of Sudan? Thanks.”

The Sudan? If your business isn’t supplying arms or mercenaries, I’m not sure that there’s much of a market…. But it’s still a pretty high risk business.

On a more serious note (how about b-flat?) one could argue that risk free rates of return are just that, risk free, and given efficient markets and arbitrage drive risk free rates toward the same levels everywhere, but we are talking about Sudan. And now for the beta / country risk.

Granted, the Chinese have made significant direct investment into Sudan. That could impact the risk equation – oil money is likely to only flow to the politically connected, and not that likely to trickle down to the general population, so look for significant skewness in the distribution of GDP.

The always infallible Wiki shows Sudan’s 2009 GDP per capita as $2300. Given that the same article also shows Sudan’s inflation rate as 12.3% , the ongoing crisis in Darfur, etc., one suspects that real output and living standards are conspicuously lower. As a result, one would expect that the time value of money is extremely biased toward immediate consumption, and the resulting risk and country adjusted interest rates are extremely high.

High as in, “my calculator only displays exponential data to two places, which isn’t enough” high.

Moral of the story: I suspect that most of the current investment and finance models come with a hidden set of assumed and unquantifiable parameters, such as reasonably free markets, liquidity of assets, actual capital markets, stable government and regulatory regimes, etc.* Once one wanders outside these realms, the models aren’t going to function with any degree of reliability.

Invest there if you think that there is a great opportunity, but don’t bother to dress up the justification with a lot of blather about net present value, the weighted average cost of capital, or efficient markets…

* Just a bone to the grad student in Finance looking for a dissertation topic. No charge.


Written by hmstewartjr

3 August 2010 at 1:20 PM

Posted in Uncategorized

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