ABSTRACT
There are several deposit markets in each currency, including domestic and different offshore markets. The political risks of triangular arbitrage vary according to which of the deposit markets in each currency are placed at the corners of the triangle. Consider the market triangle which has as its three corners the mark/dollar swap market, the US domestic deposit market and the German domestic deposit market. Political risks may be illustrated for contracts drawn in each of the three markets. The holder of the onshore-foreign deposit is subject to the political risk of the US authorities freezing externally held dollar deposits. Political risk is present in all international banking transactions. One-way arbitrage both by banks and non-banks should keep rates aligned with the swap-offshore deposit triangle which has both deposit market corners situated in the one offshore centre. Only political risk may be a slightly greater deterrent in the offshore centre, and even that only from the viewpoint of bank market-makers.
