George T Anderson#32

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What is basis trading in forex forwards?

Basis trading involves exploiting differences between spot, forward, and futures prices. For example, if the forward premium in EUR/USD diverges from interest rate differentials implied by covered interest parity, traders may arbitrage by combining forwards, swaps, and cash positions. Institutions, particularly banks, use basis trading to manage funding costs and arbitrage inefficiencies. For retail traders, basis trading is less accessible due to complexity and transaction costs. Still, understanding basis is crucial for interpreting forward curves and carry costs.