Funding Pressures and the Cross-Currency Basis. (2017)
Departure from Covered Interest Parity (CIP), known as the cross currency basis, is not just a staple of
crises: it can build up slowly and persist. Some bases exacerbated in 2008 have not gone away since then.
To understand this normality requires turning the CIP logic on its head. We look at the Foreign Exchange
(FX) swap market as the very market where scarce funding capacities are exchanged; the basis becomes an
equilibrium outcome that compensates one of the parties for the temporary loss in the possession of one of
the currencies. Ultimately, the counterparty’s funding pressure in that currency determines the willingness
to pay for such endogenous possession value.
- FX swaps; repo; Euro-Dollar currency basis; the 2008 dollar squeeze; possession; canonical buy-sell arbitrage; central banks coordinated intervention; money markets; liquidity.
Publication DateMarch, 2017
Citation InformationJean-Marc Bottazzi, Jaime Luque and Mario Pascoa. "Funding Pressures and the Cross-Currency Basis" . (2017)
Available at: http://works.bepress.com/luque/9/
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