Currency Mismatches and Corporate Default Risk : Modeling, Measurement, and Surveillance Applications

Author/Editor:

Andre O Santos ; Jorge A Chan-Lau

Publication Date:

December 1, 2006

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:

Currency mismatches in corporate balance sheets have been singled out as an important factor underlying the severity of recent financial crises. We propose several structural models for measuring default risk for firms with currency mismatches in their asset/liability structure. The proposed models can be adapted to different exchange rate regimes, are analytically tractable, and can be estimated using available equity price and balance sheet data. The paper provides a detailed explanation on how to calibrate the models and discusses two applications to financial surveillance: the measurement of systematic risk in the corporate sector and the estimation of prudential leverage ratios consistent with regulatory capital ratios in the banking sector.

Series:

Working Paper No. 06/269

Subject:

English

Publication Date:

December 1, 2006

ISBN/ISSN:

9781451865295/1018-5941

Stock No:

WPIEA2006269

Format:

Paper

Pages:

30

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