Does default risk rule out covered interest arbitrage?

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dc.contributor.advisorBackwell, Alex
dc.contributor.authorMampuru, Tebogo
dc.date.accessioned2026-04-28T12:59:33Z
dc.date.available2026-04-28T12:59:33Z
dc.date.issued2023
dc.date.updated2026-04-28T12:23:43Z
dc.description.abstractThis dissertation investigates how the default risk of European banks hampers their ability to exploit the basis in international interest rate markets. One of the reasons deviation from the covered interest parity (CIP) condition persists is the cost borne from the added cost of borrowing due to the default risk of the arbitrageur. Using risk-neutral survival probabilities implied from credit default swap (CDS) data, we determine that when we account for default risk the arbitrage sometimes disappears. It appears that the survival probabilities are relatively low when the CIP basis is high, which is consistent with default risk being a significant obstacle to exploiting the basis. Also, default risk seems to only rule out the basis when the CIP violation is small.
dc.identifier.apacitationMampuru, T. (2023). <i>Does default risk rule out covered interest arbitrage?</i>. (). University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax. Retrieved from http://hdl.handle.net/11427/43143en_ZA
dc.identifier.chicagocitationMampuru, Tebogo. <i>"Does default risk rule out covered interest arbitrage?."</i> ., University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax, 2023. http://hdl.handle.net/11427/43143en_ZA
dc.identifier.citationMampuru, T. 2023. Does default risk rule out covered interest arbitrage?. . University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax. http://hdl.handle.net/11427/43143en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Mampuru, Tebogo AB - This dissertation investigates how the default risk of European banks hampers their ability to exploit the basis in international interest rate markets. One of the reasons deviation from the covered interest parity (CIP) condition persists is the cost borne from the added cost of borrowing due to the default risk of the arbitrageur. Using risk-neutral survival probabilities implied from credit default swap (CDS) data, we determine that when we account for default risk the arbitrage sometimes disappears. It appears that the survival probabilities are relatively low when the CIP basis is high, which is consistent with default risk being a significant obstacle to exploiting the basis. Also, default risk seems to only rule out the basis when the CIP violation is small. DA - 2023 DB - OpenUCT DP - University of Cape Town KW - European banks KW - CDS LK - https://open.uct.ac.za PB - University of Cape Town PY - 2023 T1 - Does default risk rule out covered interest arbitrage? TI - Does default risk rule out covered interest arbitrage? UR - http://hdl.handle.net/11427/43143 ER - en_ZA
dc.identifier.urihttp://hdl.handle.net/11427/43143
dc.identifier.vancouvercitationMampuru T. Does default risk rule out covered interest arbitrage?. []. University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax, 2023 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/43143en_ZA
dc.language.isoen
dc.language.rfc3066eng
dc.publisher.departmentDepartment of Finance and Tax
dc.publisher.facultyFaculty of Commerce
dc.publisher.institutionUniversity of Cape Town
dc.subjectEuropean banks
dc.subjectCDS
dc.titleDoes default risk rule out covered interest arbitrage?
dc.typeThesis / Dissertation
dc.type.qualificationlevelMasters
dc.type.qualificationlevelMasters
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