FX counterparty risk and trading activity in currency forward and futures markets
The Global Financial Crisis initiated a period of market turbulence and increased counterparty risk for financial institutions. Even though the Dodd–Frank Act is likely to exempt interbank foreign exchange trading from a central counterparty mandate, market participants have the option to trade currency futures on existing futures markets which standardize counterparty risks. Evidence for the period 2005–11 indicates that the market share of currency futures trading has grown relative to the pre-crisis period. This shift may be the result of a perceived increase in counterparty risk among banks, as well as changes in relative trading costs or changes in other institutional factors.
References listed on IDEAS
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- Michael R. King & Carol Osler & Dagfinn Rime, 2011. "Foreign exchange market structure, players and evolution," Working Paper 2011/10, Norges Bank.
- Baba, Naohiko & Packer, Frank, 2009.
"Interpreting deviations from covered interest parity during the financial market turmoil of 2007-08,"
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Elsevier, vol. 33(11), pages 1953-1962, November.
- Naohiko Baba & Frank Packer, 2008. "Interpreting deviations from covered interest parity during the financial market turmoil of 2007-08," BIS Working Papers 267, Bank for International Settlements.
- Niall Coffey & Warren B. Hrung & Asani Sarkar, 2009. "Capital constraints, counterparty risk, and deviations from covered interest rate parity," Staff Reports 393, Federal Reserve Bank of New York.
- Andrew W. Lo, 2012. "Reading about the Financial Crisis: A Twenty-One-Book Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 151-78, March.
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