Covered interest arbitrage

What is covered interest arbitrage?

Covered interest arbitrage is an investment strategy designed to profit from the differences in interest rates between two countries, when buying and selling foreign currencies.

It involves using a forward contract to limit exposure  to exchange rate risk.

Where have you heard about covered interest arbitrage?

There are several arbitrage strategies investors can explore including covered interest arbitrage and uncovered interest arbitrage, which works in a similar way, but doesn’t hedge the risk.

It’s likely investors will have come across these strategies as they’re widely considered to return relatively risk free profit.

What you need to know about covered interest arbitrage…

Although covered interest arbitrage is a low-risk strategy you may find it difficult to make a large profit. Opportunities are infrequent and unless you buy and sell in bulk, exposing yourself to a greater loss, returns are likely to be small.