The Link between FX Swaps and Currency Strength during the Credit Crisis of 2007-2008

11 Pages Posted: 10 Feb 2009

See all articles by Hans Genberg

Hans Genberg

University of Geneva - Graduate Institute of International Studies (HEI)

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Alfred Wong

Hong Kong Monetary Authority

Tsz-Kin Chung

IHS Markit; Tokyo Metropolitan University

Date Written: February 10, 2009

Abstract

This note analyses the impact of the global credit crisis on the FX swap market and discusses its potential implications. The turbulence in money markets has spilled over to FX swap markets amid a reappraisal of counterparty risks during the recent financial turmoil. We examine the situations of six currencies including the euro, the British pound, the Australian dollar, the Japanese yen, the Hong Kong dollar and the Singapore dollar. We find that (i) the risk premiums have indeed gone in tandem with the spreads of money market rates over their corresponding overnight index swaps across the economies, a popular measure of potential banking insolvency; and (ii) the risk premiums bear a negative relationship with the strength of the spot rates of the respective currencies, which is consistent with the increased pressure in the swap markets.

Keywords: FX swaps, covered interest parity, counterparty risk

JEL Classification: F31, G15

Suggested Citation

Genberg, Hans and Hui, Cho-Hoi and Wong, Alfred and Chung, Tsz-Kin, The Link between FX Swaps and Currency Strength during the Credit Crisis of 2007-2008 (February 10, 2009). Available at SSRN: https://ssrn.com/abstract=1340280 or http://dx.doi.org/10.2139/ssrn.1340280

Hans Genberg

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland
+41 22 908 5928 (Phone)

Cho-Hoi Hui (Contact Author)

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

Alfred Wong

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

Tsz-Kin Chung

IHS Markit ( email )

Tokyo
Japan

Tokyo Metropolitan University

1-1 Minami Ohsawa Hachioji-shi
Tokyo 192-0397
Japan

Register to save articles to
your library

Register

Paper statistics

Downloads
287
Abstract Views
1,427
rank
105,093
PlumX Metrics