What is cross-currency basis?Cross-Currency Basis

The gap between the implied rate for dollars obtained through FX swaps and the rate for borrowing dollars directly; since 2008 it has stayed non-zero (swapped dollars cost more), showing interest rate parity breaks down in practice due to funding and balance-sheet limits.

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Arbitrage Strategies
Interest Rate Parity Arbitrage
A forward exchange rate isn't a guess; it's worked out from the interest rate gap between two currencies. When it strays, arbitrage it in four steps: borrow, convert, deposit, lock in.

Related terms

forward contract
interest rate parity
covered interest arbitrage

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Go to “Interest Rate Parity Arbitrage”