Covered interest arbitrage utilizes the forward market of foreign exchange to hedge against the risk involved in the transactions. The investor is covered against the risk of possible spot rate fluctuation while under uncovered interest arbitrage, the investor does not use the forward exchange market to hedge against foreign exchange risk. That is, the investor is not “covered” against the risk of spot rate fluctuations. An example of uncovered interest arbitrage is the speculative interest arbitrage.
Zainabdawa answered the question on August 1, 2018 at 08:34
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