The basis is applied on the non-USD leg of the swap . Here the basis is +ve as we are lending USD . In Q5 , why will there be an increase in periodic net interest payment received from swap in USD , instead it should be a decraese in interest payment made in Euro .
I’d like you to focus on two words “net” and “received“. I bet you’ve understood the rest of it.
In case you didn’t, here’s the detail: In the case of CCBS, as a US dollar lender, we’d pay less Euro because of the positive basis and receive a normal USD interest rate. On a Net basis, we’re receiving higher than what we would’ve received had there been no basis or we’d have done a normal Currency Swap. The question reads: “By hedging the position in Italian government bonds with the currency basis swap, the US investor will most likely increase the periodic net interest payments received from the swap counterparty in…”