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Chapter 4 The Link between FX Swaps and Currency Strength during the Credit Crisis of 2007–2008

In: The Evolving Role of Asia in Global Finance

Author

Listed:
  • Hans Genberg
  • Cho-Hoi Hui
  • Alfred Wong
  • Tsz-Kin Chung

Abstract

This chapter analyses the impact of the global credit crisis on the money market and discusses its potential implications. The turbulence in money markets has spilled over to foreign exchange (FX)-swap markets amid a reappraisal of counterparty risks during the recent financial turmoil. We examine the situations of six currencies: the euro, the British pound, the Australian dollar, the Japanese yen, the Hong Kong dollar, and the Singapore dollar. We find that (i) the risk premiums have indeed gone in tandem with the spreads of money market rates over their corresponding overnight index swaps across the economies, a popular measure of potential banking insolvency; and (ii) the risk premiums bear a negative relationship with the strength of the spot rates of the respective currencies, which is consistent with the increased pressure in the money and swap markets.

Suggested Citation

  • Hans Genberg & Cho-Hoi Hui & Alfred Wong & Tsz-Kin Chung, 2011. "Chapter 4 The Link between FX Swaps and Currency Strength during the Credit Crisis of 2007–2008," Frontiers of Economics and Globalization, in: The Evolving Role of Asia in Global Finance, pages 83-94, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:fegzzz:s1574-8715(2011)0000009009
    DOI: 10.1108/S1574-8715(2011)0000009009
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    Cited by:

    1. Alexis Stenfors & Lilian Muchimba, 2023. "The Transmission Mechanism of Stress in the International Banking System," Working Papers in Economics & Finance 2023-03, University of Portsmouth, Portsmouth Business School, Economics and Finance Subject Group.

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