Credit Risk Spreads in Local and Foreign Currencies
AbstractThe paper shows how-in a Merton-type model with bankruptcy-the currency composition of debt changes the risk profile of a company raising a given amount of financing, and thus affects the cost of debt. Foreign currency borrowing is cheaper when the exchange rate is positively correlated with the return on the company''s assets, even if the company is not an exporter. Prudential regulations should therefore differentiate among loans depending on the extent to which borrowers have "natural hedges" of their foreign currency exposures.
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Bibliographic InfoArticle provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.
Volume (Year): 44 (2012)
Issue (Month): 5 (08)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879
Other versions of this item:
- Zvi Wiener & Dan Galai, 2009. "Credit Risk Spreads in Local and Foreign Currencies," IMF Working Papers 09/110, International Monetary Fund.
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