Covered Interest Arbitrage

Covered Interest Arbitrage is a financial strategy where investors take advantage of interest rate differences between two countries while eliminating exchange rate risk. They do this by borrowing in the currency with a lower interest rate, converting it to the currency with a higher interest rate, and investing there. At the same time, they enter a forward contract to sell that currency back at a set rate in the future. If the combined gains from interest rate differences and currency exchange rates outweigh the costs, the arbitrage can yield a risk-free profit.