[Verse 1] When Alice buys a German bond across the sea She trades her dollars for euros naturally But currency swings could steal her gains away So she locks in a hedge to keep the wolves at bay The forward contract seems to seal the deal But there's a hidden cost that's all too real [Chorus] Cross-currency basis, the spread you can't ignore When LIBOR plus basis doesn't match the core Hedged returns get twisted by this pricing game Basis swaps reveal the cost that has no name Remember the mantra: basis bends your yield What looks protected might not be your shield [Verse 2] In perfect markets theory says it's clean Forward rates and interest gaps align pristine But reality brings frictions to the floor Bank funding costs and regulations pour Into the basis spread that widens wide Making hedged investments harder to guide [Chorus] Cross-currency basis, the spread you can't ignore When LIBOR plus basis doesn't match the core Hedged returns get twisted by this pricing game Basis swaps reveal the cost that has no name Remember the mantra: basis bends your yield What looks protected might not be your shield [Bridge] Negative basis means the hedge costs more Your foreign bond returns hit the floor Positive basis gives a pleasant surprise But markets shift and catch you by the eyes Dollar shortage drives the basis wide European bonds feel the pricing slide [Verse 3] Portfolio managers must calculate true The all-in hedged return that comes to you Take the foreign yield, subtract the basis cost Add forward points or profits might be lost International bonds need sharper tools To navigate these cross-currency rules [Chorus] Cross-currency basis, the spread you can't ignore When LIBOR plus basis doesn't match the core Hedged returns get twisted by this pricing game Basis swaps reveal the cost that has no name Remember the mantra: basis bends your yield What looks protected might not be your shield [Outro] Global fixed income's not a simple trade Currency basis keeps the game well-played Check your hedged returns before you leap Basis spreads run deeper than they seem
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