Sunday, November 6, 2016
Economy - Fluctuations in FX hedging demand matter because committing the balance sheet to arbitrage is costly. With limits to arbitrage, CIP arbitrageurs charge a premium in the forward markets for taking the other side of FX hedgers' demand .. - BIS
Publication - The failure of covered interest parity: FX hedging demand and costly balance sheets
Figure 1. Dollar basis for select currency crosses and maturities
One of the most notable financial market anomalies in the post-great financial crisis (GFC) period has been the persistent violation of the no-arbitrage condition known as covered interest rate parity (CIP), or, equivalently, the persistence of a cross-currency basis.
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Economy
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