Credit Risk Spreads in Local and Foreign Currencies

Dan Galai*, Zvi Wiener

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

6 Scopus citations


Governments, corporations, and even small firms raise and denominate capital in different currencies. We examine the micro-level factors that should be considered by a borrower when structuring debt denominated in various currencies. This paper will show how the currency composition of debt affects the cost of debt through the interaction with the risk of company's assets. We look at the currency mismatch in the firm and analyze its credit spread within a Merton's type model with bankruptcy. We show that foreign currency borrowing is cheaper when the exchange rate is positively correlated with the return on the company's assets. The determining factor is not just whether a given company is an exporter or importer, but rather the statistical correlation between the rate of return on the firm's assets and changes in the exchange rate.

Original languageAmerican English
Pages (from-to)883-901
Number of pages19
JournalJournal of Money, Credit and Banking
Issue number5
StatePublished - Aug 2012


  • Credit spread
  • Currency mismatch
  • Foreign debt
  • G12
  • G13
  • G15
  • Merton's model


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