Credit Risk Spreads in Local and Foreign Currencies

Download or read book Credit Risk Spreads in Local and Foreign Currencies written by Dan Galai and published by International Monetary Fund. This book was released on 2009-05-01 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.