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

Question

Quizplus · Accepted Answer

Covered interest arbitrage involves converting domestic currency to foreign currency, investing in the foreign country, and using a forward contract to lock in the future exchange rate, thus eliminating exchange rate risk.

To Capitalize on High Foreign Interest Rates Using Covered Interest