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Currency Mispricing and Dealer Balance Sheets

1 January 2021

By Gino Cendese (Fulcrum), Pasquale Della Corte, Tianyu Wang

We find dealer-level evidence that recent regulation on the leverage ratio requirement causes deviations from covered interest parity.  Our analysis uses a unique data set of currency derivatives with disclosed counterparty identities together with exogenous variation introduced by the UK leverage ratio framework. Dealers that are affected by the regulatory shock charge an additional premium of about 20 basis points per annum for synthetic dollar funding relative to unaffected dealers. This finding holds even after controlling for changes in clients’ demand. Also, some clients increase their trading activity with unaffected dealers with whom they already had a pre-existing relationship.

To be published in: Journal of Finance

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About the Authors

Gavyn Davies

Gavyn Davies is Chairman of Fulcrum Asset Management and co-founder of Active Partners and Anthos Capital. He was the head of the global economics department at Goldman Sachs from 1987-2001 and Chairman of the BBC from 2001-2004. He has also served as an economic policy adviser in No 10 Downing Street, and an external adviser to the British Treasury. He is a visiting fellow at Balliol College, Oxford.

Pasquale Della Corte

Tianyu Wang

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