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Answer: Amount by which the interest rate of one currency must be adjusted in a cross-currency swap so that covered interest parity (CIP) holds.
## Explanation The cross-currency swap basis is the **amount by which the interest rate of one currency must be adjusted** in a cross-currency swap so that covered interest parity (CIP) holds. **Key Points:** - When CIP doesn't hold perfectly in practice, the cross-currency basis represents the deviation - It's typically quoted as a spread over a reference rate (like LIBOR) - For example, if USD/EUR basis is -20 bps, it means the EUR leg pays 20 bps less than the theoretical CIP rate - This basis reflects funding costs, credit risk, and market liquidity conditions **Why other options are incorrect:** - **A**: Interest rate differential is part of the swap but not the basis itself - **B**: The basis affects pricing but isn't the price itself - **C**: Forward-spot differential is related but not the same as the swap basis
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Q-78. The cross-currency swap basis is the:
A
Interest rate differential in a cross-currency swap.
B
Price to the long position in a cross-currency swap.
C
Difference between the forward and spot exchange rates in a cross-currency swap.
D
Amount by which the interest rate of one currency must be adjusted in a cross-currency swap so that covered interest parity (CIP) holds.