Choose the Discount Curve in the Currency of the Debt

Summary

The document addresses how to discount a corporate loan issued by a US entity when the borrowing is denominated in euros. Its central guidance is to select a curve consistent with the debt’s currency and associated interest-rate risk. For a euro-denominated liability, that means using an appropriate euro curve rather than choosing a US curve solely because the borrower is domiciled in the United States.

If the desired valuation is in US dollars, the answer describes an equivalent route in principle: convert the future euro payments using forward exchange rates and discount them on the US curve. It presents discounting in euros followed by conversion at the spot exchange rate as the simpler approach. The short answer does not specify credit spread construction, collateral terms, or other details needed for a full loan valuation, so the curve choice should be understood as the currency-consistency principle rather than a complete valuation procedure.

Key ideas

• Discount cash flows using a curve aligned with the currency in which the debt is denominated.
• A euro loan calls for an appropriate euro curve even when the borrower is a US entity.
• A USD value can in principle be obtained using forward FX conversion and USD discounting.
• Discounting in euros and then converting at spot is presented as the simpler route.

Tags

# Valuing corporate EUR loan of US entity? Which discount rate to use? US or EU?


# Valuing corporate EUR loan of US entity? Which discount rate to use? US or EU?












If a US entity borrows in EUR and I need to perform a DCF valuation on that borrowing, should I use USD based curve (for the appropriate rating) or EUR based curves? In other words do I use the domicile (US) or the currency (EU) of the entity/loan to determine fair value? I believe in derivatives we discount based on currency and the use spot rate to convert to USD.

## Answer by RandyF (score 1, accepted)

https://quant.stackexchange.com/a/22859

You should use whatever currency in which the debt is denominated. Specifically, since it is the EUR currency and interest rate risk associated with the debt, some sort of EUR curve should be used.

Theoretically, if you are looking for the present value in USD, although the debt is denominated in EUR, you could convert future payments at the forward currency exchange rates and then discount at the USD curve, but it would be more simple to just discount using the EUR curve and then convert at the spot exchange rate.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.