An arbitrage-based risk diagnostic of the cross-currency basis swap

Richard Wise

Journal of Risk Management in Financial Institutions, 2008, vol. 2, issue 1, 36-46

Abstract: The cross-currency basis measures the yield differential between the single currency and cross-currency swap markets. The construction of discount curves for the purposes of pricing and risk-managing cross-currency cash flows necessarily incorporates this basis, resulting in a sensitivity to fluctuations in its value. The basis has proved prone to significant volatility twice in the last ten years. More recently, the credit crisis provoked a wave of fixed-income hedge fund de-leveraging which drove the basis to unprecedented levels. This paper derives a quasi-arbitrage pricing diagnostic with respect to the basis. This diagnostic is used to explain some of the empirical drivers of the US dollar–yen spread.

Keywords: currency basis swap; collateralised loan; Libor; credit-worthiness; convexity (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2008
References: Add references at CitEc
Citations:

Downloads: (external link)
https://hstalks.com/article/1321/download/ (application/pdf)
https://hstalks.com/article/1321/ (text/html)
Requires a paid subscription for full access.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2008:v:2:i:1:p:36-46

Access Statistics for this article

More articles in Journal of Risk Management in Financial Institutions from Henry Stewart Publications
Bibliographic data for series maintained by Henry Stewart Talks ().