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Covered Interest Parity and XVAs
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 rel...
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| Format: | Thesis |
| Language: | Eng |
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Department of Finance and Tax
2025
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| _version_ | 1867614199831592960 |
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| access_status_str | Open Access |
| author | Pavlou, Danae |
| author2 | Backwell, Alexander |
| author_browse | Backwell, Alexander Pavlou, Danae |
| author_facet | Backwell, Alexander Pavlou, Danae |
| author_sort | Pavlou, Danae |
| collection | Thesis |
| description | 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. |
| format | Thesis |
| id | oai:open.uct.ac.za:11427/41281 |
| institution | University of Cape Town (South Africa) |
| language | Eng |
| last_indexed | 2026-06-10T12:48:15.335Z |
| license_str | Not specified — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from UCTD — University of Cape Town Open Access Repository |
| publishDate | 2025 |
| publishDateRange | 2025 |
| publishDateSort | 2025 |
| publisher | Department of Finance and Tax |
| publisherStr | Department of Finance and Tax |
| record_format | dspace |
| source_str | UCTD — University of Cape Town Open Access Repository |
| spelling | oai:open.uct.ac.za:11427/41281 Covered Interest Parity and XVAs Pavlou, Danae Backwell, Alexander Finance and Tax 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. 2025-03-27T11:36:45Z 2025-03-27T11:36:45Z 2024 2025-03-27T11:22:44Z Thesis / Dissertation Masters MPhil http://hdl.handle.net/11427/41281 Eng application/pdf Department of Finance and Tax Faculty of Commerce University of Cape Town |
| spellingShingle | Finance and Tax Pavlou, Danae Covered Interest Parity and XVAs |
| thesis_degree_str | Master's |
| title | Covered Interest Parity and XVAs |
| title_full | Covered Interest Parity and XVAs |
| title_fullStr | Covered Interest Parity and XVAs |
| title_full_unstemmed | Covered Interest Parity and XVAs |
| title_short | Covered Interest Parity and XVAs |
| title_sort | covered interest parity and xvas |
| topic | Finance and Tax |
| url | http://hdl.handle.net/11427/41281 |
| work_keys_str_mv | AT pavloudanae coveredinterestparityandxvas |