Macro Risk
What it is:
Macro risk is the risk that the political activity in a country will affect the operations of foreign companies that do business in that country.
How it works (Example):
For example, let's say the government of the country of Cyprus is facing a fiscal crisis and decides to seize a portion of all the money in bank accounts held in the country. If American company Company XYZ does business in Cyprus and has a bank account there, some of its assets are therefore subject to the whims of the Cyprus government. In fact, any company doing business in Cyprus probably has a bank account there and thus faces this risk of seized assets. Accordingly, the crisis in Cyprus isn't contained to Cyprus -- it represents macro risk because it has ramifications for businesses around the world.
Why it Matters:
Macro risk is a major factor for international businesses, and thus it influences stock returns and portfolio strategy in turn. Macro risk is also a major factor in currency valuation.
It is important to note that macro risk is not always within a foreign government's control. Situations such as war, natural disaster or crop-destroying weather also can create macro risk.
