This paper puts forward a theory to explain the relationship among the spot exchange rate, the forward exchange rate and the interest differential between two countries in the presence of counterparty credit risk and funding liquidity risk. We argue that covered interest parity deviations...

The emergence and persistence of basis spreads in cross-currency basis swaps (CCBS) since the global financial crisis have become a mystery in international finance, as they violate the long-standing principle of covered interest parity (CIP). We argue that the phenomenon is no mystery but...

We argue that the breakdown of covered interest parity is no mystery but merely a reflection of the new trading environment in which uncollateralized and collateralized transactions have ceased to be treated as equivalent, rendering unsecured interest rates inappropriate for pricing secured...

The emergence and persistence of basis spreads in cross-currency basis swaps (CCBSs) since the global financial crisis have become a mystery in international finance, as they violate the long standing principle of covered interest parity (CIP). We argue that the phenomenon is no mystery but...