Hey,short questions about the negative basis which can be observed in the EUR/USD fx-swaps since 2007 (i.e. company A transfers EUR to company B, which transfers USD to A, afterwards A pays LIBOR but B only pays EURIBOR-spread):In 0 the notionals are exchanged (let us assume 1.000.000 EUR are exchanged for 1.380.000 USD). at the end of the swap 1.000.000 EUR is exchanged for 1.000.000*(forward exchange rate) USD. This is the way the swap is set up, isn't it?So isn't this a violation of the covered interest parity? But it is not possible for european banks to get LIBOR-funding directly so this negative basis cannot be arbitraged away. correct?Thanks, Bernd

If you can get some USD funding at LIBOR or sub LIBOR level and you can get sufficient amounts to funds your USD denominated assets, then you can arbitrage the market and get some really cheap EUR funding taking advantage of the very negative EURUSD basis. The question is : can you get USD at LIBOR level if you are a European bank today ?

I assume not and this is why the negative basis cannot be arbitraged away. I just wanted to confirm this.