Credit Risk Spreads in Local and Foreign Currencies

21 Pages Posted: 30 Jun 2009

See all articles by Dan Galai

Dan Galai

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: May 2009

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: Asset prices, Bonds, Capital markets, Corporate sector, Credit risk, Currencies, Debt, Debt restructuring, Economic models, Exchange rates, Sovereign debt

Suggested Citation

Galai, Dan and Wiener, Zvi, Credit Risk Spreads in Local and Foreign Currencies (May 2009). IMF Working Paper No. 09/110, Available at SSRN: https://ssrn.com/abstract=1426445

Dan Galai

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
972 2 5883235 (Phone)
972 2 5881341 (Fax)

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
(972)-2-588-3049 (Phone)
(972)-2-588-3105 (Fax)

HOME PAGE: http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

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