"Black and Scholes (1973) and Merton (1973, 1974) (hereafter referred to as BSM) introduced the contingent claim approach (CCA) to the valuation of corporate debt and equity. The BSM modeling framework is also named the "structural" approach to risky debt valuation. The CCA considers all...

A sovereign that is issuing debt denominated in foreign currency is exposed to a mismatch between the value of its assets that can be used to serve the debt, denominated in local currency, and the value of its liability. During economic crisis, when the probability of default by the sovereign...

The paper shows how-in a Merton-type model with bankruptcy-the currency composition of debt changes the risk profile of a company raising a given amount of financing, and thus affects the cost of debt. Foreign currency borrowing is cheaper when the exchange rate is positively correlated with the...