Covered Interest Parity Arbitrage

105 Pages Posted: 1 Apr 2019

See all articles by Dagfinn Rime

Dagfinn Rime

BI Norwegian Business School

Andreas Schrimpf

CREATES - Aarhus University; Bank for International Settlements (BIS) - Monetary and Economic Department

Olav Syrstad

Norges Bank

Multiple version iconThere are 4 versions of this paper

Date Written: March 2019


We show that it is crucial to account for the heterogeneity in funding costs, both across banks and across currency areas, in order to understand recently documented deviations from Covered Interest Parity (CIP). When CIP arbitrage is implemented accounting for marginal funding costs and realistic risk-free investment instruments, the no-arbitrage relation holds fairly well for the majority of market participants. A narrow set of global high-rated banks, however, does enjoy riskless arbitrage opportunities. Such arbitrage opportunities emerge as an equilibrium outcome as FX swap dealers set prices to avoid inventory imbalances. Low-rated banks find it attractive to turn to the FX swap market to cover their U.S. dollar funding, while swap dealers elicit opposite (arbitrage) flows by high-rated banks. Such arbitrage opportunities are difficult to scale, with funding rates adjusting as soon as arbitrageurs increase their positions.

Keywords: Covered Interest Parity, Funding Liquidity Premia, FX Swap Market, U.S. Dollar Funding

JEL Classification: E43, F31, G15

Suggested Citation

Rime, Dagfinn and Schrimpf, Andreas and Schrimpf, Andreas and Syrstad, Olav, Covered Interest Parity Arbitrage (March 2019). CEPR Discussion Paper No. DP13637, Available at SSRN:

Dagfinn Rime (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
+47-46410507 (Phone)


Andreas Schrimpf

CREATES - Aarhus University ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel

Olav Syrstad

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107

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