country risk is one-sided risk

CFA Level II
#1

Schweser pg 117 - says that there is a tendency for companies in EM to exhibit risk profiles that are one-sided (down only), meaning that the risk are asymmetrical. Adjusting the cash flows best captures these asymmetrical risks. I don’t get this. Can someone please help me understand the concept? Thnx

#2

All they are trying to say there is that, emerging-market-country-risk is not a systematic risk that could be generalized and be factored into the discount rate which is then used to valuate all the companies domiciled in that (emerging) foreign country. Rather, do the scenario-based DCF and then adjust the cash flows (mostly downwards) case-by-case bases to factor-in for those asymmetrical risks - Dinesh S

#3

Thanks Dinesh

#4

using rates implies symmetrical risks and returns but using cashflows it is possible to adjust cfs to reflect any type of scenario, not necessarily symmetrical