EXCHANGE CREDIT RISK: MEASUREMENT AND IMPLICATIONS ON THE STABILITY OF PARTIALLY DOLLARIZED FINANCIAL SYSTEMS

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Abstract

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.

Keywords: Credit Risk, Financial System, Dollarized Financial System, Exchange Rate

How to cite this paper: Mordecki, E., Pena, A., & Sosa, A. (2013). Exchange credit risk: Measurement and implications on the stability of partially dollarized financial systems. Risk Governance and Control: Financial Markets & Institutions, 3(2), 58-72. https://doi.org/10.22495/rgcv3i2art5