Credit Risk Spreads in Local and Foreign Currencies

Author/Editor:

Zvi Wiener ; Dan Galai

Publication Date:

May 1, 2009

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The 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.

Series:

Working Paper No. 2009/110

Subject:

Bonds Credit Credit risk Currencies Exchange rates Financial institutions Financial regulation and supervision Foreign exchange Money

English

Publication Date:

May 1, 2009

ISBN/ISSN:

9781451872576/1018-5941

Stock No:

WPIEA2009110

Pages:

20

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