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Mortgages Denominated in Domestic and Foreign Currencies: Simple Models

Julia Király () and Andras Simonovits ()

Emerging Markets Finance and Trade, 2017, vol. 53, issue 7, 1641-1653

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.

Date: 2017
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DOI: 10.1080/1540496X.2016.1232192

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Handle: RePEc:mes:emfitr:v:53:y:2017:i:7:p:1641-1653