Post by alanbond on Jul 28, 2009 8:35:21 GMT 4
Credit Risk Spreads in Local and Foreign Currencies
Dan Galai
Hebrew University of Jerusalem - Jerusalem School of Business Administration
Zvi Wiener
Hebrew University of Jerusalem - Jerusalem School of Business Administration
May 2009
IMF Working Paper No. 09/110
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.
papers.ssrn.com/sol3/Delivery.cfm/wp09110.pdf?abstractid=1426445&mirid=3
Dan Galai
Hebrew University of Jerusalem - Jerusalem School of Business Administration
Zvi Wiener
Hebrew University of Jerusalem - Jerusalem School of Business Administration
May 2009
IMF Working Paper No. 09/110
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.
papers.ssrn.com/sol3/Delivery.cfm/wp09110.pdf?abstractid=1426445&mirid=3