How Arbitrage Costs and Risks Shape Swap Exchange Basis

Summary

The document asks why otherwise comparable swaps traded through different clearing venues, such as CME and LCH, may have different quoted rates. It proposes evaluating the basis by considering the costs and risks of buying one swap and selling the other, and asks what factors determine the theoretical boundary for that difference.

This is a useful framing question about relative pricing and arbitrage between cleared swaps, but the document does not provide an answer, a calculation method, or market evidence. It leaves open which costs and risks should be included, how to quantify them, and how they constrain the basis. Any practical analysis would need to examine the specific contracts and market conditions; the prompt alone does not establish a theoretical bound or show that an apparent price difference can be captured profitably.

Key ideas

• The document asks why swaps cleared through different venues can trade at different quoted rates.
• It frames the exchange basis as a potential arbitrage relationship between offsetting swaps.
• It suggests that arbitrage costs and risks may help define a theoretical boundary for the basis.
• It does not specify the relevant costs, risks, or a method for calculating that boundary.

Tags

# Why exchange basis exist in swaps


# Why exchange basis exist in swaps












For example, swaps traded in CME versus LCH are quoted with slight difference? how do we decide the theoretical boundary of the basis ? what factors need to be consider?

I think the principal to decide the basis should be some along the line of: if you were to go and do arbitrage between the two swaps(buy one and sell another), what would be the cost and risk associated with it ? Am I right one this ?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.