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They all might have to become nurses...

Grand... So this type of concoction with all the legs which are supposed to hedge all the risks is, in fact, what's known as a cross currency basis swap. In theory, it's supposed to be arbitrage, so shouldn't really trade, but in practice, like many similar "bases" it's actually used to hedge...

Yeah, it's arnd 60, maybe even a bit higher now... Anecdotally, there are lots of 80+ year olds driving cabs in Tokyo, so that they can support their 100+ year old parents, lots of whom are hooked up to feeding tubes in hospitals.

Anyone wanna guess the average age of a taxi driver in Japan? No peeking...

Yes, indeed. In fact, AFAIK, this is how all the non-USD x-ccy basis is priced in the mkt. It's all done via USD, sorta like what the FX options mkt does for funkier ccy pairs. It also follows that it's much less liquid and would, most of the time, be traded "by appointment". So I'd still...

To be sure, what you mention here are still USD related...

Yes, but nowhere as pronounced or significant...

Perfect... So our simple FX swap is exposed to rate differential risk (obviously, not to FX risk, since we're buying and selling the same amount of GBPUSD). Imagine if we did the FX swap described above and then at exactly the same moment put on offsetting rates trades (more about the...

Sure thing... Firstly, let's make sure that everyone is on the same page in terms of the definitions. The simple trade which you have previously described (commonly known as an FX swap), would work, for example, as follows: you buy 1MM GBPUSD spot at 1.29 and simultaneously agree to sell 1MM...

I am afraid this isn't really answering my question... The SNB, obviously, IS holding and will continue to hold onto its FX reserves. The question I keep asking is "what is the form these reserves should be held in". Obviously, this matters, because the possibility of choice implies risk...

@Sig: Again, I apologize for my lack of clarity above. Now that I've finally had a good night's sleep, I am pretty sure I should be able to explain how the x-ccy basis relates to the "no arbitrage" logic. If you want me to, let me know.

To be sure, what you've described here and above is NOT an arb in any sense of the word. I am referring to the simple trade where you borrow USD/lend GBP spot and do the opposite fwd. It's just an interest rate trade, where you're exposed to the rate differential risk. To make it into at...

I am offering this as an example. In reality no explicit tax exists. That said, the price of the scarce resource needed to do these trades is not 0 and also is not constant. Every day that you hold this trade, you need to pay some uncertain amount for the privilege. Moreover, the key is...

You can enter into such a transaction, sure... But, as a trivial example, what if I told you that such a trade is going to be subject to an arbitrary tax assessed every day? Would you still consider it to be "risk free arbitrage"?

Gonna be a lengthy one... I hope I am able to convey my thinking with some clarity. Imagine that cash is precious and that, apart from all the "normal" risks you face when lending it to someone (e.g. counterparty risk), there is also the possibility you wouldn't have enough on hand to deal...

You can't arb this, as there is no hedge for the liquidity/banking system balance sheet factor... You can speculate and take advantage of the basis to obtain a certain return, but this will involve taking risk and thus will not be an arb. I can elaborate further, if you wish.

X-ccy basis represents the idiosyncratic value of USD liquidity. That's the "extortion fee" that @Eurokopek referred to and it's simply the additional value associated with holding USD cash or cash-like instruments.

Boom! I am certain that with all the correct inputs and day count conventions etc, you'd reprice it correctly.

They are simply both sensitive, at least for the moment, to the broad "risk aversion" factor. That's all there is to it.

Yeah, and in FI space they can do bigly amts of tasty, juicy EM, like Russia and Brazil.