Seminar 217, Risk Management: Financial Frictions, Foreign Currency Borrowing, and Systemic Risk

Seminar 217, Risk Management: Financial Frictions, Foreign Currency Borrowing, and Systemic Risk

Risk Seminar
Mar 12, 2019, 11:00 AM - 12:30 PM | 1011 Evans Hall | Happening As Scheduled
Speakers: Robert Marquez, UC Davis (Speaker - Featured)
We present a novel explanation for the prevalence of foreign-currency borrowing in emerging markets. First, under limited liability, foreign-currency denominated debt acts as a state-contingent claim: Borrowers maximizing profits in local currency are partly shielded from large devaluations through bankruptcy, when repaying foreign currency debt is expensive, but pay higher rates in...