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1

You are right that the cross currency basis with risk free rates shouldn't be flat. I would like to add to dm63 that the Bank of International Settlements wrote a very interesting paper on the cross currency basis Covered interest parity lost The author of the article you are refering to assumes covered interest parity, which is an arbitrage relation, see ...


4

You are correct, the currency basis swaps between risk free rates do not trade flat. To understand why , it’s instructive to imagine how to arbitrage it. Pretty easy, it might seem. One would borrow some USD for 5yrs at SOFR , invest some EUR for 5yrs at ESTR, and then enter the basis swap whereby you lend USD and borrow EUR , picking up 17bp. All the ...


0

Simple answer is that risk free in one currency does not mean risk free for all accounting currencies i.e estr in eur with eur as the accounting / pnl currency being approximately risk free does not mean that estr with usd as the accounting / pnl currency will be risk free.


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