Valuation of International Corporate Debt Issues
University of San Andres
Universidad Nacional de General Sarmiento
When a corporation makes debt issues denominated in different currencies, their default risk and also their yield rates are influenced by the exchange rate process between those currencies. This paper presents a model of corporate debt valuation that captures this influence, effectively extending the default risk analysis of Merton (1974) to a two currency world. We obtain the corporate yield in each of the currencies, and show the credit risk effect of foreign currency exposure on claim's value. We found a closed form valuation equation for corporate debt, when the debt value depends on two lognormal risk factors, company value and exchange rate. This determination of a closed form solution of Merton's problem with two risk factors is one of this paper's main contributions. The valuation equation provides the yield rates that the firm should pay in each of the currencies in which it issues debt, as a function of the company's value and the exchange rate process.
Number of Pages in PDF File: 29
Keywords: Corporate Debt, Credit Risk, International Issues, Debt Valuation, Two factors closed form solution
JEL Classification: F39, G120, G300working papers series
Date posted: January 22, 2002
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