Photo by sharonmccutcheon from unsplash
Using contract-level supervisory data, we show that dollar forward sales by non-U.S. banks that are initiated at the end of a quarter and mature shortly after it concludes trade at… Click to show full abstract
Using contract-level supervisory data, we show that dollar forward sales by non-U.S. banks that are initiated at the end of a quarter and mature shortly after it concludes trade at higher prices and higher volumes. These effects are driven by banks with large net on-balance-sheet dollar assets that they can hedge around quarter ends by selling dollars forward (increasing off-balance-sheet short positions), which suggests regulatory arbitrage to reduce capital charges for open foreign exchange (FX) exposure. Our results indicate that demand effects related to banks’ management of FX exposure are an important driver of deviations from covered interest rate parity.
Journal Title: Review of Financial Studies
Year Published: 2020
Link to full text (if available)
Share on Social Media: Sign Up to like & get
recommendations!