Cross Currency Basis Interview Guide
Cross-currency basis interview guide for funding imbalance, covered interest parity, FX swaps, stress, examples, and caveats.
Candidates discussing FX funding markets and relative value caveats.
Basis measures a funding wedge
Cross-currency basis captures deviations from the clean covered-interest relationship, often reflecting funding demand, balance sheet costs, or market stress.
Basis is not free arbitrage
A basis may persist because the trade consumes balance sheet, collateral, credit, liquidity, or regulatory capacity. The apparent spread has costs.
Concrete example
If dollar funding is scarce, swapping another currency into dollars can embed a basis that compensates for funding pressure and constraints.
Stress changes basis behavior
During market stress, funding needs and balance-sheet limits can widen basis even when textbook no-arbitrage intuition suggests convergence.
Common mistakes
Candidates often say arbitrage will close the basis. Strong answers explain why funding frictions can make deviations persistent.
Practice the pattern
Use the LeetQuidity curriculum and calibration to turn this topic into a focused practice plan.