  Intuitively, the default risk of a single borrower is higher when her or his
assets and debt are denominated in different currencies. Additionally, the
default dependence of borrowers with assets and debt in different currencies
should be stronger than in the one-currency case. By combining well-known
models by Merton (1974), Garman and Kohlhagen (1983), and Vasicek (2002) we
develop simple representations of PDs and asset correlations that take into
account exchange rate risk. From these results, consistency conditions can be
derived that link the changes in PD and asset correlation and do not require
knowledge of hard-to-estimate parameters like asset value volatility.
