Covered interest arbitrage

Simultaneously borrowing and depositing in two different currencies and dealing a forward foreign exchange contract between the same currency pair to cover the related foreign exchange exposure.

Covered interest arbitrage activity normally results in the rapid alignment of the forward foreign exchange rate with the related interest rates, as predicted by Interest rate parity theory.

See also

• Arbitrage
• Covered arbitrage
• Covered position
• Foreign exchange forward contract
• Forward foreign exchange rate
• Interest rate parity
• Uncovered interest arbitrage