medium · FRM Part 2 Liquidity & Treasury Risk
A dealer bank observes that its balance sheet is 'pinned' at the end of the quarter.
How does this seasonally affect the cross-currency basis for a bank that needs to borrow USD through the swap market?
- The basis typically compresses toward zero
- The basis typically becomes more negative (widens)
- The basis becomes positive (a premium for EUR or JPY)
- The spot rate becomes perfectly correlated with the basis
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