Under covered interest arbitrage

Question

Quizplus · Accepted Answer

Covered interest arbitrage involves investing in foreign currency that has a higher interest rate, while simultaneously hedging against exchange rate risk. This process tends to equalize the interest rate differentials between countries, leading to the expectation that the currency of the country with higher short-term interest rates will depreciate in the future. This depreciation offsets the higher interest earnings, ensuring no arbitrage profit is made due to interest rate differentials alone.

Under Covered Interest Arbitrage