Research

Work in Progress

Option-Implied Local-Currency Credit Spreads

with P. Augustin, A. Jeanneret & E. Patelli

Building on Culp et al. (2018), we develop a method to extract option-implied corporate credit spreads in both local (LC) and foreign (FC) currencies. Using FX and stock index options from 29 developed and emerging markets, we construct a dataset of matched LC and FC credit spreads that isolate the same underlying default risk. This design ensures that differences between FC and LC spreads reflect currency-specific risk premia, rather than liquidity, legal, or institutional factors, issues that can confound similar measures based on bond data. We document two main findings: (1) LC pseudo credit spreads significantly predict future economic activity at both the country and global levels, and (2) the FC-LC spread differential embeds a novel risk premium from option prices – capturing the cyclical property of exchange rates – that forecasts currency movements. These results underscore the importance of currency denomination in credit pricing and the potential for currency diversification in global credit markets.

Presented at: UQAM Brownbag Seminar, 2025 Summer PhD Conference - McGill University, 2025 FMA Annual Meeting, 2025 CityUHK International Finance Conference, 2023 Rotman Junior Finance Faculty Conference.