Template-type: ReDIF-Paper 1.0
Author-Name: Dr. Daniel Kohler
Author-Name-First: Daniel
Author-Name-Last: Kohler
Author-Name: Dr. Benjamin Müller
Author-Name-First: Benjamin
Author-Name-Last: Müller
Author-Person: pml37
Title: Covered interest rate parity, relative funding liquidity and cross-currency repos
Abstract: Deviations from the covered interest rate parity (CIP) are considerably smaller or even zero when calculated based on a particular set of repo rates, so-called cross-currency repo rates, instead of standard interest rates, such as overnight indexed swap or Interbank Offered rates. We attribute this (partial) solution of the CIP puzzle to the nearly identical risk characteristics of foreign exchange swaps and cross-currency repos: both are virtually devoid of counterparty credit risk but incorporate a relative funding liquidity premium. In practice, CIP deviations can thus be exploited on a truly riskless basis using cross-currency repo transactions, which is not the case for other interest rates.
Length: 33 pages
Creation-Date: 2019
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2019/working_paper_2019_05
File-Format: text/html
Number: 2019-05
Classification-JEL: E43, F31, G12, G14, G15
Keywords: Covered interest rate parity, FX swap market, cross-currency repos, funding
Handle: RePEc:snb:snbwpa:2019-05