Geo-Political and Regulatory Risk Quantification - An Approach to Quantify Risks and Their Effect on the Effective Cost of Capital of the Project

This paper aims to serve as a guideline to more proactive risk evaluation and management. Each firm is supposed to have certain amount of systematic (undiversifiable) and idiosyncratic (diversfiable) risk. By the very definition of systematic risks, it is inherent to the firm because of the industry it operates in. However the idiosyncratic risk keeps changing because of various decisions that the firm makes, including portfolio decisions. The paper proposes a technique to isolate the idiosyncratic risk of a project/business in a firm from the global portfolio of the firm. It focuses on quantifying this idiosyncratic part of geopolitical and regulatory risks. The idea is to use this quantifiable risk to understand the effective cost of capital for the project, and hence equip the project manager with a tangible decision tool for risk prioritization and mitigation, and portfolio management. The proposed framework has a broad range of applications across a multitude of projects (field operations, manufacturing, logistics etc.) and geographical locations