November 22nd, 2016, 2:33 pm
I don't know either what it means, it is just my 2 pennies on a potential economic rationale given that if I am EURO investor and I want to buy say some bonds/Shares in the US that would yield say 5-6%
Either I hedge with a rolling spot FX or CCBS and in this case the cost of hedging would be Dom rates-foreign rates-CCBS...and this would be quite expensive..or I can hedge using an FX Option at strike=spot
I know this is not a replication argument but here we would need an economic model says with different agents ( investors, hedgers, fund raisers both EUR and USD based) and this is pure speculation I believe it will lead to
a functional formula of the type
CCBS=f(Fx vol, Fx forward, Maturity, other parameters)
Other parameters would characterise the economy