Covered Interest Parity and XVAs
| dc.contributor.advisor | Backwell, Alexander | |
| dc.contributor.author | Pavlou, Danae | |
| dc.date.accessioned | 2025-03-27T11:36:45Z | |
| dc.date.available | 2025-03-27T11:36:45Z | |
| dc.date.issued | 2024 | |
| dc.date.updated | 2025-03-27T11:22:44Z | |
| dc.description.abstract | Covered interest parity relies on a traditional no-arbitrage argument and states that the difference in interest rates between two currencies should be linked to the spot and forward exchange rates. One would expect an arbitrage opportunity to be traded away, however, the covered interest parity relationship has been shown to break down with the arbitrage opportunity persisting. This dissertation seeks to show that valuation adjustments can be considered one of the reasons why covered interest arbitrage persists. A classic covered interest parity trade is considered, where we borrow directly from the South African market and simultaneously synthetically lend rand, which involves entering a foreign exchange contract to fix the exchange rate. From this setup, we look to derive, from first principles, the net value of the strategy, highlighting the funding valuation adjustment. Further, the default of both parties within the strategy is considered, which allows us to consider the credit valuation adjustment and the debt valuation adjustment. | |
| dc.identifier.apacitation | Pavlou, D. (2024). <i>Covered Interest Parity and XVAs</i>. (). University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax. Retrieved from http://hdl.handle.net/11427/41281 | en_ZA |
| dc.identifier.chicagocitation | Pavlou, Danae. <i>"Covered Interest Parity and XVAs."</i> ., University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax, 2024. http://hdl.handle.net/11427/41281 | en_ZA |
| dc.identifier.citation | Pavlou, D. 2024. Covered Interest Parity and XVAs. . University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax. http://hdl.handle.net/11427/41281 | en_ZA |
| dc.identifier.ris | TY - Thesis / Dissertation AU - Pavlou, Danae AB - Covered interest parity relies on a traditional no-arbitrage argument and states that the difference in interest rates between two currencies should be linked to the spot and forward exchange rates. One would expect an arbitrage opportunity to be traded away, however, the covered interest parity relationship has been shown to break down with the arbitrage opportunity persisting. This dissertation seeks to show that valuation adjustments can be considered one of the reasons why covered interest arbitrage persists. A classic covered interest parity trade is considered, where we borrow directly from the South African market and simultaneously synthetically lend rand, which involves entering a foreign exchange contract to fix the exchange rate. From this setup, we look to derive, from first principles, the net value of the strategy, highlighting the funding valuation adjustment. Further, the default of both parties within the strategy is considered, which allows us to consider the credit valuation adjustment and the debt valuation adjustment. DA - 2024 DB - OpenUCT DP - University of Cape Town KW - Finance and Tax LK - https://open.uct.ac.za PB - University of Cape Town PY - 2024 T1 - Covered Interest Parity and XVAs TI - Covered Interest Parity and XVAs UR - http://hdl.handle.net/11427/41281 ER - | en_ZA |
| dc.identifier.uri | http://hdl.handle.net/11427/41281 | |
| dc.identifier.vancouvercitation | Pavlou D. Covered Interest Parity and XVAs. []. University of Cape Town ,Faculty of Commerce ,Department of Finance and Tax, 2024 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/41281 | en_ZA |
| dc.language.rfc3066 | Eng | |
| dc.publisher.department | Department of Finance and Tax | |
| dc.publisher.faculty | Faculty of Commerce | |
| dc.publisher.institution | University of Cape Town | |
| dc.subject | Finance and Tax | |
| dc.title | Covered Interest Parity and XVAs | |
| dc.type | Thesis / Dissertation | |
| dc.type.qualificationlevel | Masters | |
| dc.type.qualificationlevel | MPhil |