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It's an arbitrage issue. If you can borrow EUR for 1% and it costs %1 to get a USD/EUR hedge, you can turn around and loan USD for 2% and be guaranteed to not
by cperciva 9y ago
It's an arbitrage issue. If you can borrow EUR for 1% and it costs %1 to get a USD/EUR hedge, you can turn around and loan USD for 2% and be guaranteed to not lose money. The market eliminates arbitrage opportunities whenever they appear; so if the cost of borrowing EUR is less than the cost of borrowing USD, you'll have to pay at least the difference in order to get someone to guarantee a rate for converting USD back to EUR later.
- ikeboy 9y agoThere could in theory be other risks in EUR which prevent the arbitrage (legal? liquidity? cost of initial transaction being high?) which is why I'd prefer to see actual numbers bearing that out instead of just a derivation from first principles.