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Review of Quantitative Finance and Accounting

Erschienen in:

15.03.2021 | Original Research

Is Foreign Exchange Risk Priced in Bank Loan Spreads?

verfasst von: Young Sang Kim, Junyoup Lee, Ha-Chin Yi

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 3/2021

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Abstract

This study investigates the effects of foreign exchange (FX) exposure on bank loan spreads. Private bank loans are a major form of corporate financing in both developing and developed countries. However, the international component of credit risk in bank loan pricing has been largely ignored. Controlling for firm- and loan-level characteristics, our results show that firm-level FX exposure is positively related to loan spreads. The results imply that, if other loan and firm characteristics remain constant, syndicated loan lenders view FX exposure as an additional risk factor that can impede future loan repayments. As a result, lenders price borrowing firms’ FX exposure, driven by cash flow volatility and foreign operation. The results are robust to different measures of FX exposure, firm fixed effects, cash flow volatility, and controlling for other confounding factors. Our findings are consistent with those of prior international finance studies that document a positive relation between firm-level cash flow volatility and FX exposure and provide important implications for MNCs and policymakers involved with cross-country operations.

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Titel: Is Foreign Exchange Risk Priced in Bank Loan Spreads?
verfasst von: Young Sang Kim
Junyoup Lee
Ha-Chin Yi
Publikationsdatum: 15.03.2021
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 3/2021
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-021-00970-9

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