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

Which observation would most clearly indicate that the announcement of central bank swap lines succeeded in easing the dollar shortage?

A narrowing of the negative cross-currency basis, with lower dollar premiums in FX swap markets, indicates success. The basis measures deviation from covered interest parity and reflects the cost of dollar funding, so a backstop that eases the shortage should shrink it.

  1. AA widening of the negative cross-currency basis
  2. BA narrowing of the negative cross-currency basis and lower dollar funding premiums in FX swap marketsCorrect
  3. CA rise in the number of banks hoarding dollars
  4. DA larger deviation from covered interest parity

Explanation

A dollar shortage shows up as a more negative cross-currency basis, a deviation from covered interest parity. Effective backstops reduce the premium borrowers pay for dollars, so the basis narrows toward zero. The other options indicate worsening stress.

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