To capitalize on high foreign interest rates using covered interest arbitrage, a U.S. investor would convert dollars to the foreign currency, invest in the foreign country, and simultaneously sell the foreign currency forward.

Question

Quizplus · Accepted Answer

This is the basic process of covered interest arbitrage, where the investor takes advantage of higher interest rates in a foreign country by investing in that country's currency and simultaneously hedging against exchange rate fluctuations by selling the foreign currency forward.

To Capitalize on High Foreign Interest Rates Using Covered Interest