Pricing Models Based on a Risk Comparison Between Domestic and Foreign Currency Loan

Abstract:

A direct foreign currency loan may help companies reduce loaning cost, nevertheless, the fluctuation of exchange rate may increase the default probabilities of companies. Models of default probability and the value of loan for both domestic and foreign currency loan were established and a comparative study was made of the difference by numerical computation. The correlation analysis of the exchange rate and the property of the companies shows a positive correlation or lower negative correlation leads to a lower default probability of foreign loan, but it is quite a different case when there is a higher negative correlation. Therefore, from the perspective of default probability, a basic standard is proposed for companies to select the loan.