Covered interest arbitrage involves an exchange of currency A for currency B at the spot rate.

Question

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Covered interest arbitrage involves exchanging currency A for currency B at the current spot rate, then investing in a financial instrument denominated in currency B, and simultaneously entering into a forward contract to convert the proceeds back into currency A at a future date. This strategy aims to exploit differences in interest rates between two currencies while hedging against exchange rate risk.

Covered Interest Arbitrage Involves an Exchange of Currency a for Currency