Uncovered Interest Arbitrage

Uncovered Interest Arbitrage is a financial strategy where investors take advantage of differing interest rates between two countries without using forward contracts to hedge against exchange rate risk. An investor borrows money in a country with lower interest rates, converts it to the other country's currency, and invests in assets offering higher returns. If the future exchange rate stays the same or moves favorably, the investor profits from the interest rate differential. However, because the exchange rate is uncertain, there's a risk of potential losses if currencies move unexpectedly, making this strategy potentially profitable but also risky.