Cross currency basis – what is it? And what are the implications?

Towards the end of this year, a December spike in the cross currency basis for major currencies against the dollar grabbed the market’s attention. But what is cross currency basis (“the basis”)?

Consider a European company taking a one year loan from its domestic local bank to fund its US operations abroad. In order to hedge the currency risk, the company enters into a one year EUR/USD currenc…

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