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Analysts expect the LIBOR to rise in the next two years. Hence, all companies that have foreign currency loans will face problems. I am preparing a study on this topic, but data is an extreme issue.

I am currently having the LT Debt in Foreign Currency for around 1000 companies, but I do not have the actual currency and I also do not know if this debt is fixed/floating.

How would you set up such a study? Any suggestions, which balance sheet items should be stressed?

I appreciate your replies!

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To evaluate the impact on your FX portfolio of an increase in LIBOR, or any other rate for that matter, you must know:

  • Which currencies you have exposure to
  • Which positions have a floating rate exposure and to what rate.

You can then model the relationship between LIBOR and those variables. Without that information, you cannot do anything.

For example, if you have an exposure to the USD, you can model the relationship between LIBOR and USD and setup a test that stress LIBOR and using the model asses the impact on your portfolio.

As another example, if you have fixed debt, you need to model the relationship between LIBOR and the yield on this debt.

You cannot simply stress balance sheet items without information.

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  • $\begingroup$ You can then model the relationship between LIBOR and those variables., what do you mean by that specifically? How would you do this? $\endgroup$ – Kare Oct 27 '15 at 18:36
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    $\begingroup$ You need to find out how these variables move in relation to one another $\endgroup$ – AfterWorkGuinness Oct 27 '15 at 18:42
  • $\begingroup$ So basically correlate these two variable? Please clarify how to do that? $\endgroup$ – Kare Oct 27 '15 at 18:52
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    $\begingroup$ Correlation is only a linear relationship, it's quite possible that these variables move in a non-linear fashion. First, as I said in my answer, you need to identify the variables such as what currencies you are exposed to, then you can research to find models that exist to describe how those variables can be affected by a change in LIBOR. If your research turns up nothing, or you don't understand what you've found, ask here. This site is for specific questions though, it's not geared towards general ones. Thus, if you do have questions about what you found, be specific. $\endgroup$ – AfterWorkGuinness Oct 27 '15 at 18:56
  • $\begingroup$ Here is a tutorial on what kinds of questions this site can help with: quant.stackexchange.com/tour $\endgroup$ – AfterWorkGuinness Oct 27 '15 at 18:59

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