IMF Working Papers

Credit Risk Spreads in Local and Foreign Currencies

By Zvi Wiener, Dan Galai

May 1, 2009

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Zvi Wiener, and Dan Galai. Credit Risk Spreads in Local and Foreign Currencies, (USA: International Monetary Fund, 2009) accessed November 24, 2024
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.

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

Publication Details

  • Pages:

    20

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2009/110

  • Stock No:

    WPIEA2009110

  • ISBN:

    9781451872576

  • ISSN:

    1018-5941

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