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Mortgages Denominated in Domestic and Foreign Currencies: Simple Models

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  • Júlia Király
  • András Simonovits

Abstract

We design a family of simple models of foreign currency-denominated (FXD) loans to compare the cash flows of installments and the paths of outstanding debts denominated in domestic and foreign currencies, respectively. Using them, we draw several conclusions relevant to the recent debates about the FXD loans. We demonstrate the key role played by the uncovered interest rate parity in the comparisons. Moreover, we give a closed-form solution for the trade-off between the currency depreciation and the unilateral FX interest rate increases by the banks. We determine the optimal size of domestic and FXD loans, respectively.

Suggested Citation

  • Júlia Király & András Simonovits, 2017. "Mortgages Denominated in Domestic and Foreign Currencies: Simple Models," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(7), pages 1641-1653, July.
    • Handle: RePEc:mes:emfitr:v:53:y:2017:i:7:p:1641-1653
    DOI: 10.1080/1540496X.2016.1232192
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    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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