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Currency Risk and Country Risk in International Banking
Author(s) -
SHAPIRO ALAN C.
Publication year - 1985
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1985.tb05014.x
Subject(s) - purchasing power parity , currency , liberian dollar , country risk , monetary economics , foreign exchange risk , interest rate parity , economics , reserve currency , international economics , inflation (cosmology) , currency substitution , business , financial system , exchange rate , finance , theoretical physics , physics
This paper focuses on the conditions under which banks are subject to currency and country risks on their dollar‐denominated loans to foreign firms and governments. We conclude that currency risk is a function of the rates of domestic and foreign inflation, deviations from purchasing power parity, and the effect of these deviations on the firm's and the nation's dollar‐equivalent cash flows. Country risk is largely determined by the variability of the nation's terms of trade and the government's willingness to allow the national economy to adjust rapidly to changing economic fortunes.