Covered interest arbitrage involves:

Question

Quizplus · Accepted Answer

Covered interest arbitrage involves both a spot rate and a forward rate. It is a strategy where an investor can earn risk-free profits by simultaneously borrowing in one currency, converting it to another currency at the current spot exchange rate, and investing it in the second currency for a specified period. The investor also enters into a forward contract to sell the second currency at a future date to cover the initial borrowing. The profit arises from the difference between the interest rate earned on the investment and the interest rate paid on the borrowing, as well as any gain from the exchange rate movement between the two currencies.

Covered Interest Arbitrage Involves