Learning objectives: Describe the general trends of emerging economics over the past decade. Examine the risk factors that firms face due to external debt and explain how these risks are transmitted to the financial system. Analyze the role of corporate debt in emerging economies using the following case studies: External commercial borrowings in India; Foreign currency lending to Turkish corporates; Corporate bond issuance in Latin America. Explain the policy implications related to the risks associated with issuance of corporate debt in emerging economies.
Questions:
707.1. The Committee on International Economic Policy and Reform studied recent patterns of corporate debt in emerging economies. They identified the following four specific risks that firms face due to external debt:
I.. Maturity risk: funds (liabilities) have shorter terms than investments (assets)
II. Currency risk: issuing liabilities in a different currency than revenues
III. Roll-over risk: fickle investor base due to, for example, redemption requests or benchmark tracking strategies
IV. Speculative risk: if treasury operation acts as a profit center
In regard to these risks, which are largely balance sheet-related risks, which of the following is TRUE according to the authors?
a. Any of these risks can materialize and transmit as shock(s) to the financial system via either direct or indirect channels
b. Studies demonstrate that firms tend to INCREASE their risk-taking when spreads increase (aka, widen) during periods of low global liquidity
c. Each of these risks can be DIRECTLY and successfully monitored by regulators who can assert control over the balance sheets of global firms
d. Metrics that attempt to identify or predict firms who could encounter trouble in the event of a foreign exchange shock are neither predictive, statistically significant nor realistically useful
707.2. The Committee on International Economic Policy and Reform analyzed the role of corporate debt in emerging economies, in particular with case studies of India, Turkey and Latin America over roughly the decade before 2015. Each of the following is true as a key finding among the three case studies EXCEPT which is not true?
a. In Latin America, non-financial corporations effectively engaged a carry trade and evaded capital controls by issuing international bonds
b. The India case study suggests that market-based measures of foreign exchange risk, such as FX β, are better at capturing firm vulnerability than balance sheet measures
c. Turkey, like many other emerging markets, exhibited a correlation between the share of foreign currency loans (as a percent of total loans) and "global liquidity" as measured by the VIX
d. In emerging markets including India, Turkey and Latin America, non-financial corporates greatly decreased their issuance of foreign currency denominated debt over the case study period
707.3. Among the policy implications related to the risks associated with issuance of corporate debt in emerging economies, each of the following is a strongly-felt recommendation by the Committee EXCEPT which among these is their LEAST favorite?
a. Central clearing of derivatives contracts
b. Regulate activities or functions rather than entities
c. Subsidize lending to small-and medium-sized enterprises (SMEs)
d. Conservative risk-weighted capital requirements and liquidity coverage ratio (LCR) with higher-than-minimum run-off rates
Answers here:
Questions:
707.1. The Committee on International Economic Policy and Reform studied recent patterns of corporate debt in emerging economies. They identified the following four specific risks that firms face due to external debt:
I.. Maturity risk: funds (liabilities) have shorter terms than investments (assets)
II. Currency risk: issuing liabilities in a different currency than revenues
III. Roll-over risk: fickle investor base due to, for example, redemption requests or benchmark tracking strategies
IV. Speculative risk: if treasury operation acts as a profit center
In regard to these risks, which are largely balance sheet-related risks, which of the following is TRUE according to the authors?
a. Any of these risks can materialize and transmit as shock(s) to the financial system via either direct or indirect channels
b. Studies demonstrate that firms tend to INCREASE their risk-taking when spreads increase (aka, widen) during periods of low global liquidity
c. Each of these risks can be DIRECTLY and successfully monitored by regulators who can assert control over the balance sheets of global firms
d. Metrics that attempt to identify or predict firms who could encounter trouble in the event of a foreign exchange shock are neither predictive, statistically significant nor realistically useful
707.2. The Committee on International Economic Policy and Reform analyzed the role of corporate debt in emerging economies, in particular with case studies of India, Turkey and Latin America over roughly the decade before 2015. Each of the following is true as a key finding among the three case studies EXCEPT which is not true?
a. In Latin America, non-financial corporations effectively engaged a carry trade and evaded capital controls by issuing international bonds
b. The India case study suggests that market-based measures of foreign exchange risk, such as FX β, are better at capturing firm vulnerability than balance sheet measures
c. Turkey, like many other emerging markets, exhibited a correlation between the share of foreign currency loans (as a percent of total loans) and "global liquidity" as measured by the VIX
d. In emerging markets including India, Turkey and Latin America, non-financial corporates greatly decreased their issuance of foreign currency denominated debt over the case study period
707.3. Among the policy implications related to the risks associated with issuance of corporate debt in emerging economies, each of the following is a strongly-felt recommendation by the Committee EXCEPT which among these is their LEAST favorite?
a. Central clearing of derivatives contracts
b. Regulate activities or functions rather than entities
c. Subsidize lending to small-and medium-sized enterprises (SMEs)
d. Conservative risk-weighted capital requirements and liquidity coverage ratio (LCR) with higher-than-minimum run-off rates
Answers here:
