If debt contracts are denominated in foreign currency,then an unanticipated decline in the value of the domestic currency results in
A)a decline in a firm's net worth.
B)an increase in a firm's net worth.
C)a decrease in adverse selection and moral hazard.
D)an increase in willingness to lend.

Question

Quizplus · Accepted Answer

When debt contracts are denominated in foreign currency and the value of the domestic currency declines unexpectedly, the value of the debt in the domestic currency increases. This leads to a decrease in the firm's net worth as the debt becomes more expensive to repay.

If Debt Contracts Are Denominated in Foreign Currency,then an Unanticipated