02440cas a2200277 a 4500 AALejournalIMF015799 230101c9999 xx r poo 0 0eng d 5.00 USD 9781513509006 1018-5941 BD-DhAAL BD-DhAAL Hong, Gee Hee. What Do Deviations from Covered Interest Parity and Higher FX Hedging Costs Mean for Asia / Gee Hee Hong, Anne Oeking, Kenneth Kang, Changyong Rhee. Washington, D.C. : International Monetary Fund, 2019. 1 online resource (35 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Asian countries have high demand for U.S. dollars and are sensitive to U.S. dollar funding costs. An important, but often overlooked, component of these costs is the basis spread in the cross-currency swap market that emerges when there are deviations from covered interest parity (CIP). CIP deviations mean that investors need to pay a premium to borrow U.S. dollars or other currencies on a hedged basis via cross-currency swap markets. These deviations can be explained by regulatory changes since the global financial crisis, which have limited arbitrage opportunities and country-specific factors that contribute to a mismatch in the demand and supply of U.S. dollars. We find that an increase in the basis spread tightens financial conditions in net debtor countries, while easing financial conditions in net creditor countries. The main reason is that net debtor countries are, in general, unable to substitute smoothly to other domestic funding channels. Policies that promote reliable alternative funding sources, such as long-term corporate bond market or stable long-term investors, including a 'hedging counterpart of last resort,' can help stabilize financial intermediation when U.S. dollar funding markets come under stress. Mode of access: Internet Kang, Kenneth. Oeking, Anne. Rhee, Changyong. IMF Working Papers; Working Paper ; No. 2019/169 Full text available on IMF http://elibrary.imf.org/view/journals/001/2019/169/001.2019.issue-169-en.xml IMF e-Library