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FRM Part II · FRM Exam Part II · The US Dollar Shortage in Global Banking and the International Policy Response

A non-US bank has a 3-month dollar funding gap of USD 200 million and bridges it with a 3-month EUR/USD FX swap, borrowing dollars and lending euros. Suppose the cross-currency basis is -60 bps annualized versus a basis of zero under covered interest parity. Ignoring other costs, what is the approximate extra cost, in USD, of this swap-based dollar funding over the 3 months compared with funding at the parity-implied rate?

The extra cost is about USD 300,000. A 60 bps annualized negative basis on USD 200 million costs USD 1.2 million a year, and for a three-month swap one quarter of that applies, giving USD 300,000 above the parity-implied funding cost.

  1. AUSD 300,000Correct
  2. BUSD 1,200,000
  3. CUSD 120,000
  4. DUSD 600,000

Explanation

The basis of -60 bps annualized is an extra 0.60% per year for borrowing dollars. For three months: 200,000,000 x 0.0060 x 0.25 = 300,000. Check: 0.60% x 200m = 1.2m per year, divided by 4 = 0.3m. USD 1.2m forgets the quarter fraction; USD 600,000 uses half a year; USD 120,000 misplaces the decimal.

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