Open AccessExchange credit risk: Measurement and implications on the stability of partially dollarized financial systems
Author(s) -
Ernesto Mordecki,
Alejandro Pena,
Andrés Sosa
Publication year - 2013
Publication title -
risk governance and control: financial markets and institutions
Language(s) - English
Resource type - Journals
eISSN - 2077-4303
pISSN - 2077-429X
DOI - 10.22495/rgcv3i2art5
Subject(s) - loan , economics , financial stability , exchange rate , monetary economics , financial market , credit risk , stability (learning theory) , business , financial economics , financial system , finance , machine learning , computer science
Some emergent economies present a high financial dollarization in loans and deposits, generating a specific risk in the banking activity. We quantify this exchange credit risk as the price of an option equivalent to this loan, and discuss the financial stability implications due to the (implicit) issuance of these options. The exchange rate is modeled through a Levy process. The depth of the market depends on the type of the currencies involved. Whenever possible, we depart from option prices to calibrate a model, like in the EUR/USD market. But if the market is not liquid, as the USD/UYU market, we provide alternative pricing methodologies.