Credit Risk Spreads in Local and Foreign Currencies

Zvi Wiener and Dan Galai

No 2009/110, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; bond; yield to maturity; capital structure; credit spread; foreign debt; currency mismatch; Merton’s model; dollarization; foreign currency bond; currency composition; rate of exchange rate fluctuation; currency exposure; rate of return on equity; expected return; euro debt; euro currency; Currencies; Exchange rates; Credit risk; Bonds; Credit; South America; Global (search for similar items in EconPapers)
Pages: 20
Date: 2009-05-01
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Credit Risk Spreads in Local and Foreign Currencies (2012)
Journal Article: Credit Risk Spreads in Local and Foreign Currencies (2012)
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