Hedging demand can cause covered interest parity violations – BIS paper
US dollar forward hedging demand can cause covered interest parity to fail, authors say
Economists at the Bank for International Settlements have designed a model that helps explain the deviation from covered interest parity (CIP) after 2012, presenting their results in a working paper published on October 27.
Authors Vladyslav Sushko, Claudio Borio, Robert Neil McCauley and Patrick McGuire note CIP deviations tend to occur during periods of market stress. However, since 2012, the CIP relationship has failed without coinciding with an increase in bank credit risk or wholesale US
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