The covered interest parity conundrum

Darrell Duffie explains why it’s difficult to arbitrage direct and swap-implied funding rates

Darrell Duffie is the Dean Witter distinguished professor of finance at Stanford University’s Graduate School of Business, and professor by courtesy in the university’s economics department. He has recently been an adviser on financial markets to a range of bodies, including the Financial Stability Board and several Federal Reserve banks. It has become significantly cheaper for some big banks to borrow US dollars outright in wholesale funding markets than to borrow dollars indirectly through