Credit Risk Spreads in Local and Foreign Currencies

Abstract

We study in this paper the considerations that should be taken into account in the decision of currency decomposition of debt. The problem we are addressing in this paper is what should be the differential credit spread for a given firm, whether it issues bonds in local currency or in a foreign currency. For a firm which wants to raise a given amount in debt, and which can either float bonds denominated in local currency, say dollar, or in foreign currency, say euro, what will be the resulting credit spread in each case Can we argue that since the leverage in both cases is the same (by construction) than also the risk premium should be the same? Given the investments of the firm we can find a financial decision which minimizes the probability of default for a given leverage.