Covered interest parity
TheoryDefinition
No-arbitrage relationship between forward FX rates and interest rate differentials. Forward = spot × (1 + r_quote) / (1 + r_base). Sustained violations of CIP (the "cross-currency basis") signal funding stress in one currency.
Post-2008, persistent CIP violations have been documented — partly due to bank balance-sheet costs (Basel III) making the arbitrage trade less profitable in dollar terms. The "cross-currency basis" widens in dollar funding stress.
Post-2008, persistent CIP violations have been documented — partly due to bank balance-sheet costs (Basel III) making the arbitrage trade less profitable in dollar terms. The "cross-currency basis" widens in dollar funding stress.
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