## _wp09110 - References

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### Introduction: scope and research question
- Context: globalization increases cross-border capital raising and prevalence of foreign-currency–denominated funding; dollarization and foreign-currency lending occur even when financing from abroad is not available.
- Focus: micro-level factors a borrower should consider when structuring debt denominated in various currencies.
- Exclusions: macroeconomic implications of loan dollarization, causes/consequences of de facto dollarization, and determinants of saving in foreign currency are not addressed.
- Two dominant approaches in literature:
  - Currency mismatch — differences in direct currency composition of assets and liabilities.
  - Hedging and empirical exposure — relationship between firm share returns and exchange rate fluctuations; hedging via pricing, operational hedges, and financial instruments.
- Core problem: whether currency composition of debt matters for credit spreads (yield to maturity minus default-free rate), and how choice of bond currency should affect the credit spread for a given firm.
- Key claim: currency composition matters to the extent it changes a firm’s financial risk, and thus should be reflected in differential credit spreads.

### The model: Merton (1974) framework extended for exchange-rate risk
- Setup:
  - American firm with asset value V issues pure discount debt with face value F and market value B maturing at time T; risk-free rate r is constant; parameters in dollar terms.
  - Under Black-Scholes/Merton assumptions, yield to maturity y is given by equation (1); spread s relative to the local safe rate: s = y − r (equation (2)).
  - Bond value: B = Fe−rT·N(d1) + V·(1 − N(d2)) (equations (3), (3’)).
- Foreign-currency issuance:
  - Current exchange rate x0; consider euro issuance with x following a Wiener process with volatility σX and correlation ρ with firm-asset returns.
  - Volatility of firm assets in euro terms: σE^2 = σ^2 + σX^2 − 2ρσσX (equation (4) as presented).
  - Face value in euros FE determined by equality of present values (equation (5)); FE requires numerical solution because d1E and d2E depend on FE.
  - Spread on euro-denominated debt: sE = yE − rE (equation (6)).

### Numerical baseline and illustrative calculations
- Baseline dollar-denominated bond (parameters exactly as given):
  - V = $100
  - B = $70
  - T = 5 years
  - σ = 20 percent
  - r = 5 percent
  - Resulting face value: F = $98.27 (to obtain current value B=$70 using equation (3’))
  - Yield to maturity: y = 6.78 percent
  - Spread: s = 178bp
  - Risk-neutral probability of default (RNP), N(−d2): 35.4 percent
  - Present value of credit risk (5-year put on V with strike F): $6.53, i.e., 6.53 percent of the assets of the firm (LGD present value)
- Euro-denominated bond assumptions:
  - x0 = 1
  - rE = 5 percent
  - σX = 6 percent
- Illustrative result for ρ = 20 percent:
  - FE = €97.9 produces a present value of $70 (dollar)
  - Spread over the euro risk-free rate: 171bp (compared to 178bp for the dollar bond)
  - RNP of default: (value referenced but truncated in the excerpt)

### Key quantitative findings on currency composition and credit risk (exact reported cases)
- Base case parameters: V=$100, current value of debt $70, r = r_E = 5 percent, σ=20 percent, σ_X=6 percent, T=5.
- At correlation ρ=0.2:
  - Face Value (in €): 97.9
  - Spread: 171 basis points
  - PD (risk neutral): 34.6 percent
  - Put Value: $6.24
- At correlation ρ=0.4:
  - Face Value (in €): 96.4
  - Spread: 140 basis points
  - PD (risk neutral): 31.2 percent
  - Put Value: $5.09
- At correlation ρ=0.0:
  - Face Value (in €): 99.4
  - Spread: 202 basis points
  - PD (risk neutral): 37.7 percent
  - Put Value: $7.43
- At correlation ρ=-0.2:
  - Face Value (in €): 101.0
  - Spread: 233 basis points
  - PD (risk neutral): 40.4 percent
  - Put Value: $8.66
- Comparative statement: issuing euro-denominated bonds for the same present value in dollars can lead to lower credit risk and lower price of default (POD). Example: present cost of the credit risk is $6.24 (compared to $6.53); with ρ=0.4 the spread declines to 140 basis points and the value of the credit risk is $5.09.

### Betas and risk allocation across correlation regimes (B/V = 0.7, exact table values)
- For V=$100, B/V=0.7, r=5 percent, σ=20 percent, σ_X=6 percent, T=5:
  - ρ = -0.4: Beta of Equity = 2.5188; Beta of Foreign Currency Debt = 0.3491; PD = 43.0 percent
  - ρ = -0.3: Beta of Equity = 2.5397; Beta of Foreign Currency Debt = 0.3401; PD = 41.7 percent
  - ρ = -0.2: Beta of Equity = 2.5617; Beta of Foreign Currency Debt = 0.3307; PD = 40.4 percent
  - ρ = -0.1: Beta of Equity = 2.5847; Beta of Foreign Currency Debt = 0.3208; PD = 39.1 percent
  - ρ = 0.0: Beta of Equity = 2.6090; Beta of Foreign Currency Debt = 0.3104; PD = 37.7 percent
  - ρ = 0.1: Beta of Equity = 2.6346; Beta of Foreign Currency Debt = 0.2995; PD = 36.2 percent
  - ρ = 0.2: Beta of Equity = 2.6616; Beta of Foreign Currency Debt = 0.2879; PD = 34.6 percent
  - ρ = 0.3: Beta of Equity = 2.6903; Beta of Foreign Currency Debt = 0.2756; PD = 33.0 percent
  - ρ = 0.4: Beta of Equity = 2.7207; Beta of Foreign Currency Debt = 0.2625; PD = 31.2 percent
- Domestic debt reference (same parameter set): beta of equity = 2.6479; beta of debt = 0.2938.

### Mechanisms and intuition
- Natural hedge effect:
  - Positive correlation ρ between asset returns (local currency) and the exchange rate reduces firm volatility expressed in foreign currency (σE), lowering credit spreads.
  - When ρ is zero or negative, foreign-currency liabilities add a new risk factor and increase required compensation (higher spreads) because of convexity of bond payoffs.
- Volatility relationship: σ_E^2 = σ^2 + σ_X^2 − 2ρσσ_X; as ρ increases, σ_E^2 declines.
- Credit spread sensitivity depends on σ_X; higher σ_X increases sensitivity of spreads to ρ.

### Comparative spreads across exchange-rate volatility scenarios
- Spreads on foreign-currency bonds evaluated for σ_X = 3 percent, 6 percent, and 9 percent (with V=100, r=5 percent, σ=20 percent, T=5, r_E=5 percent).
  - Horizontal reference at 178 basis points = spread for local-currency-denominated debt (σ_X = 0 percent).
  - For sufficiently high ρ, spreads on foreign-currency bonds fall below 178 basis points.
  - Sensitivity of spread to ρ is smaller for smaller σ_X; all three σ_X graphs intersect at positive ρ.

### Extensions to Modigliani and Miller (M&M) and asset pricing implications
- Under perfect capital markets (no taxes, no bankruptcy costs) and constant leverage B/V:
  - No contradiction with M&M Proposition I: firm value V assumed given and unaffected by financing.
  - Extension of Proposition II: required return on equity becomes a function of leverage ratio and the correlation coefficient ρ (three-dimensional).
  - Numerical illustration: expected return on stock varies with B/S and ρ (example figure shows ρ = +0.5, 0, and -0.6).

### Practical implications and policy recommendations
- Corporate financing:
  - Firms can reduce probability of insolvency and financing costs by choosing debt denominated in a currency highly correlated with the rate of return on their assets.
  - Overuse of foreign-currency debt by firms with negative correlation to the exchange rate can increase PD and spreads.
  - The model quantifies a “structural” or “natural hedge,” informing hedging policy and potentially reducing reliance on financial hedging.
- Prudential regulation:
  - Regulators can evaluate foreign-currency credit exposures by assessing borrowers’ natural hedges using the structural model.
  - Model applies to banks that lend in local currency but obtain funding in foreign currency.
- Indexed instruments:
  - If correlation between asset returns and inflation is positive, issuing CPI-linked (indexed) bonds can reduce required risk premium; indexed-linked bonds may be more attractive than exchange-rate-linked bonds for firms without a natural hedge.
  - This mechanism can contribute to de-dollarization in practice.

### Additional quantitative relationships and appendices (high-level)
- Face value mapping (Appendix I):
  - Relationship between F_E and F depends on σ_X and ρ; F_E increases with F and sensitivity of F_E(F) increases with σ_X.
  - For σ_X = 6 percent, 20 percent, 30 percent (with V=100, r=5 percent, σ=20 percent, T=5y, r_E=5 percent, ρ=10 percent) the F_E vs F curves diverge by σ_X level.
  - For fixed σ_X = 6 percent, F_E is smaller relative to F the higher is ρ (examples for ρ = -20 percent, 0, +20 percent).
- Inflation and exchange-rate links (Appendix II):
  - If nominal return RV = Π · W and Π and W uncorrelated, Var(RV) = σ_Π^2 + σ_W^2 (equation (8)).
  - If exchange rate x fluctuates around PPP (x = Π_E / Π), then σ_x^2 includes σ_Π^2 and a PPP-deviation term σ_υ^2 (equation (10)).
  - Correlation of asset returns and the exchange rate (equation (11)) increases with σ_Π (inflation volatility); higher σ_Π can create positive correlation and make foreign-currency borrowing more attractive.
  - Correlation of asset returns with inflation exceeds correlation with exchange rate under the appendix’s assumptions, implying indexed-linked debt can be more attractive than foreign-currency debt when inflation co-moves more with asset returns.

*Source: _wp09110 - 34.6 percent (compared to 35.4 percent). The present cost of the credit risk is $6.24*

### References..............................................................................................................

### _wp09110 - References

### Introduction: scope and research question
- Context: globalization increases cross-border capital raising and prevalence of foreign-currency–denominated funding; dollarization and foreign-currency lending occur even when financing from abroad is not available.
- Focus: micro-level factors a borrower should consider when structuring debt denominated in various currencies.
- Exclusions: macroeconomic implications of loan dollarization, causes/consequences of de facto dollarization, and determinants of saving in foreign currency are not addressed.
- Two dominant approaches in literature:
  - Currency mismatch — differences in direct currency composition of assets and liabilities; cited as an important factor in financial crises.
  - Hedging and empirical exposure — relationship between firm share returns and exchange rate fluctuations; hedging via pricing, operational hedges, and financial instruments.
- Core problem addressed: whether currency composition of debt matters for credit spreads (yield to maturity minus default-free rate), and how choice of bond currency should affect the credit spread for a given firm.
- Key claim: currency composition matters to the extent it changes a firm’s financial risk, and thus should be reflected in differential credit spreads.

### The model: Merton (1974) framework with exchange-rate risk
- Framework:
  - American firm with asset value V issues pure discount debt with face value F and market value B maturing at time T; risk-free rate r is constant; parameters in dollar terms.
  - Under Black-Scholes/Merton assumptions, yield to maturity y is given by equation (1) (involving d1, d2, N(⋅), V, F, r, T).
  - Spread s relative to the local safe rate: s = y − r, given in equation (2).
  - Bond value expressed per Merton as in equations (3) and (3’): B = Fe−rT·N(d1) + V·(1 − N(d2)) simplifies to (3’): B = Fe−rT·N(d1) + V·(1 − N(d2)).
- Foreign-currency extension:
  - Consider issuing bonds in euros: x0·BE = B, with x0 current exchange rate (assumed 1:1).
  - Exchange rate x follows a Wiener process with volatility σx and constant correlation ρ with firm-asset returns.
  - Volatility of firm assets in euro terms σE satisfies: σE^2 = σ^2 + σX^2 − 2ρσσX (presented as .2 222 ρσσσσσ XXE −+ = in source notation).
  - Face value in euros FE must satisfy equation (5) (numerical solution required because d1E and d2E depend on FE).
  - Spread on euro-denominated debt sE defined analogously by equation (6).
- Analytical insight: s and sE are not necessarily equal; whether one exceeds the other depends on asset volatility, exchange-rate volatility, and their correlation ρ. FE must be obtained numerically.

### Numerical example and quantitative illustrations
- Baseline dollar-denominated bond (numerical parameters exactly as given):
  - V = $100
  - B = $70
  - T = 5 years
  - σ = 20 percent
  - r = 5 percent
  - Resulting face value: F = $98.27 (to obtain current value B=$70 using equation (3’))
  - Yield to maturity: y = 6.78 percent
  - Spread: s = 178bp
  - Risk-neutral probability of default (RNP), measured by N(−d2): 35.4 percent
  - Present value of credit risk (5-year put on V with strike F): $6.53, i.e., 6.53 percent of the assets of the firm (LGD present value)
- Euro-denominated bond assumptions added:
  - x0 = 1
  - rE = 5 percent
  - σX = 6 percent
- Illustrative result reported (exactly as stated for a specific correlation case):
  - For correlation ρ = 20 percent:
    - FE = €97.9 produces a present value of $70 (dollar)
    - Spread over the euro risk-free rate: 171bp (compared to 178bp for the dollar bond)
    - RNP of default: (value referenced but truncated in source excerpt; numerical RNP for this case follows from table/appendix not reproduced here)
- Notes on solution method:
  - FE is the sole unknown in equation (5) and a unique numerical solution exists because the right-hand side of (5) is monotonic in FE.
  - Analytic closed-form solution for FE is not available because d1E and d2E depend on FE; numerical methods are required.

### Key equations and quantities (as presented in source)
- Yield to maturity (equation (1)): y expressed in terms of d1, d2, N(⋅), V, F, r, T.
- Spread: s = y − r (equation (2)).
- Bond value in Merton model (equations (3), (3’)): B = Fe−rT·N(d1) + V·(1 − N(d2)).
- Foreign-currency asset volatility relationship (equation (4) in source notation): σE derived from σ, σX, and ρ.
- Face value FE determined by equality of present values in domestic terms (equation (5)); FE solved numerically.
- Spread on foreign-currency debt (equation (6)): sE = yE − rE.
- Present value of credit risk (equation (7)): put-option expression yielding PV of potential shortfall (LGD).

### Analytical and practical implications highlighted
- Currency composition of corporate debt affects credit spreads because it alters probability of default and credit risk valuation through interaction of asset-return volatility and exchange-rate movements.
- Correlation ρ between firm-asset returns and exchange-rate movements is a central determinant: different ρ values change σE, FE, sE, and RNP.
- Operational and financial hedging, pricing, and asset allocation decisions interact with currency-denomination choices and can mitigate or exacerbate credit risk.
- Numerical examples illustrate that a firm with identical present-value debt can face different spreads when denominated in different currencies, even when risk-free rates and current exchange rate are equal.

*Italicized source attribution line as provided in the source content.*

### 34.6 percent (compared to 35.4 percent). The present cost of the credit risk is $6.24

### _wp09110 - 34.6 percent (compared to 35.4 percent). The present cost of the credit risk is $6.24

### Key quantitative findings on currency composition and credit risk
- For a base case with V=$100, current value of debt $70, dollar and euro risk-free interest rates 5 percent, asset volatility σ=20 percent, exchange rate volatility σ_X=6 percent, and T=5:
  - At correlation ρ=0.2:
    - Face Value (in €): 97.9
    - Spread: 171 basis points
    - PD (risk neutral): 34.6 percent
    - Put Value: $6.24
  - At correlation ρ=0.4:
    - Face Value (in €): 96.4
    - Spread: 140 basis points
    - PD (risk neutral): 31.2 percent
    - Put Value: $5.09
  - At correlation ρ=0.0:
    - Face Value (in €): 99.4
    - Spread: 202 basis points
    - PD (risk neutral): 37.7 percent
    - Put Value: $7.43
  - For negative correlations, spreads and PD rise; example for ρ=-0.2:
    - Face Value (in €): 101.0
    - Spread: 233 basis points
    - PD (risk neutral): 40.4 percent
    - Put Value: $8.66
- Comparative statement: issuing euro-denominated bonds for the same present value in dollars can lead to lower credit risk and lower price of default (POD). Example: present cost of the credit risk is $6.24 (compared to $6.53) in the reported comparison; with ρ=0.4 the spread declines to 140 basis points and the value of the credit risk is $5.09.

### Betas and risk allocation across correlation regimes (B/V = 0.7)
- Table 2 results (V=$100, B/V=0.7, r=5 percent, σ=20 percent, σ_X=6 percent, T=5):
  - ρ = -0.4: Beta of Equity = 2.5188; Beta of Foreign Currency Debt = 0.3491; PD = 43.0 percent
  - ρ = -0.3: Beta of Equity = 2.5397; Beta of Foreign Currency Debt = 0.3401; PD = 41.7 percent
  - ρ = -0.2: Beta of Equity = 2.5617; Beta of Foreign Currency Debt = 0.3307; PD = 40.4 percent
  - ρ = -0.1: Beta of Equity = 2.5847; Beta of Foreign Currency Debt = 0.3208; PD = 39.1 percent
  - ρ = 0.0: Beta of Equity = 2.6090; Beta of Foreign Currency Debt = 0.3104; PD = 37.7 percent
  - ρ = 0.1: Beta of Equity = 2.6346; Beta of Foreign Currency Debt = 0.2995; PD = 36.2 percent
  - ρ = 0.2: Beta of Equity = 2.6616; Beta of Foreign Currency Debt = 0.2879; PD = 34.6 percent
  - ρ = 0.3: Beta of Equity = 2.6903; Beta of Foreign Currency Debt = 0.2756; PD = 33.0 percent
  - ρ = 0.4: Beta of Equity = 2.7207; Beta of Foreign Currency Debt = 0.2625; PD = 31.2 percent
- Domestic debt reference: beta of equity = 2.6479; beta of debt = 0.2938 (same parameter set).

### Mechanisms and intuition
- Currency denomination creates a "natural hedge" when the rate of return on assets (in local currency) and the exchange rate are significantly positively correlated:
  - Positive ρ reduces firm volatility expressed in foreign currency and lowers credit spreads.
  - When ρ is zero or negative, foreign-currency liabilities add a new risk factor and increase required compensation (higher spreads) because of convexity of bond payoffs.
- Relationship between firm volatility in euros and correlation:
  - From equation (4) in the text: σ_E^2 = σ^2 + σ_X^2 − 2ρσσ_X (presented as ρσσσσσ_XXE 2 222 −+ = in the source). As ρ increases, σ_E^2 declines.
  - Credit spread is an increasing function of σ_E^2; thus higher ρ tends to reduce spreads, with sensitivity depending on σ_X.

### Comparative spreads and exchange-rate volatility scenarios
- Spreads on foreign-currency bonds are shown for σ_X = 3 percent, 6 percent, and 9 percent (with V=100, r=5 percent, σ=20 percent, T=5, r_E=5 percent).
  - A horizontal reference at 178 basis points represents the spread for local-currency-denominated debt (σ_X = 0 percent).
  - For sufficiently high ρ, spreads on foreign-currency bonds fall below 178 basis points (i.e., lower than local-currency spreads).
  - All three σ_X graphs intersect at positive ρ; sensitivity of spread to ρ is smaller for smaller σ_X.

### Extensions to Modigliani and Miller (M&M) framework
- Assumptions: perfect capital markets, no taxes, no bankruptcy costs; leverage ratio (B/V) held constant in market-value terms while debt currency composition changes.
- Conclusions relative to M&M:
  - No contradiction with M&M Proposition I: firm value V is assumed given and unaffected by financing; foreign-currency bonds can be priced by non-arbitrage while keeping total debt B constant.
  - Extension of Proposition II: required return on equity becomes a function of leverage ratio and the correlation coefficient ρ (three-dimensional), i.e., expected rate of return on equity depends on B/S and ρ.
  - Numerical illustration: Figure 2 shows expected return on stock as a function of B/S for ρ = +0.5, 0, and -0.6; higher ρ produces a steeper relationship.

### Practical implications and policy recommendations
- Corporate financing:
  - Firms can reduce probability of insolvency and financing costs by choosing debt denominated in a currency highly correlated with the rate of return on their assets.
  - Overuse of foreign-currency debt by firms with negative correlation to the exchange rate can have negative consequences (higher PD and spreads).
  - The model can guide hedging policy by quantifying a “structural” or “natural hedge,” potentially reducing reliance on financial hedging.
- Prudential regulation:
  - Regulators can evaluate foreign-currency credit exposures of financial institutions by assessing borrowers’ natural hedges using the structural model.
  - The model applies to banks that lend in local currency but obtain funding in foreign currency.
- Indexed instruments:
  - If correlation between asset returns and inflation is positive, issuing CPI-linked (indexed) bonds can reduce required risk premium; indexed-linked bonds may be more attractive than exchange-rate-linked bonds for firms without a natural hedge.
  - This mechanism can contribute to de-dollarization in practice.

### Additional quantitative relationships and appendices
- Face value mapping (Appendix I):
  - Relationship between foreign currency face value F_E and local face value F depends on σ_X and ρ; F_E increases with F and sensitivity of F_E(F) increases with σ_X.
  - For σ_X = 6 percent, 20 percent, 30 percent (with V=100, r=5 percent, σ=20 percent, T=5y, r_E=5 percent, ρ=10 percent) the F_E vs F curves diverge by σ_X level.
  - For fixed σ_X = 6 percent, F_E is smaller relative to F the higher is ρ (examples shown for ρ = -20 percent, 0, +20 percent).
- Inflation and exchange-rate links (Appendix II):
  - If nominal return RV = Π · W and Π and W uncorrelated, Var(RV) = σ_Π^2 + σ_W^2 (equation (8)).
  - If exchange rate x fluctuates around PPP (x = Π_E / Π), then σ_x^2 includes σ_Π^2 and a PPP-deviation term σ_υ^2 (equation (10)).
  - Correlation of asset returns and the exchange rate (equation (11)) is an increasing function of σ_Π (inflation volatility); thus higher σ_Π can create positive correlation and make foreign-currency borrowing more attractive.
  - Correlation of asset returns with inflation exceeds correlation with exchange rate under the appendix’s assumptions, implying indexed-linked debt can be more attractive than foreign-currency debt when inflation co-moves more with asset returns.

*Source: _wp09110 - 34.6 percent (compared to 35.4 percent). The present cost of the credit risk is $6.24*

### REFERENCES

### REFERENCES

### Works on dollarization, currency mismatch, and local currency debt
- Armas, Adrian, Alain Ize, and Eduardo Levy Yeyati (Eds.), 2006, Financial Dollarization, IMF, Palgrave.
- Havrylyshyn, O., and C. Beddies, 2003, “Dollarization in the Former Soviet Union: from hysteria to hysteresis,” Comparative Economic Studies, Vol. 45(3) (September).
- Chan-Lau, J. A. and A. O. Santos, 2006, “Currency Mismatches and Corporate Default Risk: Modeling, Measurement, and Surveillance applications”, IMF Working Paper, WP/06/269.
- Holland, Allison, and Christian Mulder, 2006, “Can Indexed Debt Absolve Original Sin? The Role of Inflation-indexed Debt in Developing Local Currency Markets,” in Armas, Adrian, Alain Ize, and Eduardo Levy Yeyati (Eds.), 2006, Financial Dollarization, IMF, Palgrave.
- Caballero, R. J., and A. Krishnamurthy, 2005, “Excessive Dollar Debt: Financial Development and Underinsurance,” Journal of Finance 58(2), pp. 867-793.

### Foundational option, contingent-claims, and corporate finance theory
- Black F., and M. Scholes, 1973, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy 81 (3): pp. 637–654.
- Merton, R. C. 1974, “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,” Journal of Finance 29, pp. 449-70.
- Merton, R. C., 1977, “On the Pricing of Contingent Claims and the Modigliani-Miller Theorem,” Journal of Financial Economics 5, pp. 241-249.
- Modigliani, F., and M. Miller, 1958, “The Cost of Capital, Corporation Finance and the Theory of Investment” American Economic Review, 48 (3), pp. 261–297.
- Galai, D., 1988, “Corporate Income Taxes and the Valuation of Claims on the Corporation”. Research in Finance , Vol. 7, pp. 75-90.
- Crouhy M., D. Galai, and R. Mark, 2000, Risk Management, McGraw-Hill.
- Crouhy M., D. Galai, and R. Mark, 1998, “Credit Risk Revisited,” Risk (Credit Risk Supplement), (March), pp. 40–44, reprinted I. Shimko, I. (Ed.), 1999, Credit Risk: Models and Management, Risk Book (1999).

### Sovereign debt, sovereign default, and sovereign credit risk modeling
- Bulow, J., and K. Rogoff, 1989, “A Constant Recontracting Model of Sovereign Debt,” Journal of Political Economy 97, 155-178.
- Eaton, J., and M. Gersowitz, 1981, “Debt with Potential Repudiation: Theoretical and Empirical Analysis,” Review of Economic Studies, 48, pp. 288-309.
- Catao, L. and B. Sutton, 2002, “Sovereign Default: The Role of Volatility,” IMF Working Paper WP/02/149.
- Duffie, D., L. H. Pedersen, and K. J. Singleton. 2003, “Modeling Sovereign Yield Spreads: A Case Study of Russian Debt,” Journal of Finance, pp. 119-159.
- Gibson, R., and S. Sundaresan, 2001, “A Model of Sovereign Borrowing and Sovereign Yield Spreads,” Working Paper, Columbia University.
- Gray, D. F., R. C. Merton, and Z. Bodie,2007, A Contingent Claims Approach to Measuring and Managing Sovereign Credit Risk, Working Paper. Harvard Business School.
- Hilscher, J., and Y. Nosbusch, 2007, Determinants of Sovereign Risk: Macroeconomic Fundamentals and the Pricing of Sovereign Debt, Working Paper. London School of Economics.
- Longstaff, F. A., J. Pan, L. H. Pederson, and K. J. Singleton, 2007, “How Sovereign Is Sovereign Credit Risk?” NBER Working Paper No. 13658, December.

### Exchange rate exposure, multinational firms, and corporate foreign exchange risk
- Jorion, P., 1990, “The Exchange Rate Exposure of U.S. Multinationals”, Journal of Business 63, pp. 331-345.
- Dominguez, K., and L. Tesar, 2006,”Exchange Rate Exposure,” Journal of International Economics 68, pp. 188-218.
- Griffin, J.M., and R.M. Stulz, 2001, “International Competition and Exchange Rate Shocks: A Cross-country Industry Analysis of Stock Returns,” Review of Financial Studies 14(1), pp. 215-241.
- Cornell, B., and A. C. Shapiro, 1983, "Managing Foreign Exchange Risks." Midland Corporate Finance Journal, Fall, pp. 16-31.
- Bodnar, G.M., B. Dumas, and R.C. Marston, 2002, “Pass-through and Exposure,” Journal of Finance 57(1), pp. 199-231.
- Levich, R.M., 2001, International Financial Markets, 2nd edition, McGraw-Hill.

### Credit spreads, credit risk drivers, and valuation of credit instruments
- Litterman, R. and T. Iben, 1991, “Corporate Bond Valuation and the Term Structure of Credit Spreads,” Financial Analysts Journal (Spring), pp. 52-64.
- Weigel, D. D. and G. Gemmill, 2006, “What Drives Credit Risk in Emerging Markets? The Roles of Country Fundamentals and Market Co-movements,” Journal of International Money and Finance, 25, pp. 476-502.
- Longstaff, F. A., J. Pan, L. H. Pederson, and K. J. Singleton, 2007, “How Sovereign Is Sovereign Credit Risk?” NBER Working Paper No. 13658, December.

*Source: REFERENCES (from _wp09110 - REFERENCES).*

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