Credit Risk Spreads in Local and Foreign Currencies
May 1, 2009
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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.
Subject: Bonds, Credit, Credit risk, Currencies, Exchange rates, Financial institutions, Financial regulation and supervision, Foreign exchange, Money
Keywords: bond, Bonds, capital structure, Credit, Credit risk, credit spread, Currencies, currency composition, currency exposure, currency mismatch, dollarization, euro currency, euro debt, Exchange rates, expected return, foreign currency bond, foreign debt, Global, Merton’s model, rate of exchange rate fluctuation, rate of return on equity, South America, WP, yield to maturity
Pages:
20
Volume:
2009
DOI:
Issue:
110
Series:
Working Paper No. 2009/110
Stock No:
WPIEA2009110
ISBN:
9781451872576
ISSN:
1018-5941
