Financial Risk Manager Part 2
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A portfolio manager at a US-based hedge fund has been searching for potential return opportunities in the environment of declining global interest rates experienced after the global financial crisis (GFC) of 2007-2009. The manager identifies the existence of a positive cross-currency basis between two currencies and notes that this positive basis has persisted since the GFC. What is the most appropriate explanation for this persistence?
A
The costs for arbitrageurs to finance their positions are increasingly reflected in the basis.
B
The costs of credit value adjustments have increased, as arbitrage positions typically eliminate counterparty risks.
C
Regulatory changes have permitted an increase in US banks' speculative proprietary trading activities.
D
The addition of a liquidity risk cost to swap pricing is no longer required given the decline in the overall level of interest rates in the global economy.