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Covered Interest Arbitrage
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A simple currency swap in which the counterparties exchange currencies at both the spot and forward rates simultaneously. The forward swap restores currency exposures to the original position without a currency gain or loss-making this a way to adjust exposure to a narrowing or widening of interest rate differentials rather than adjusting currency exposures. Covered interest arbitrage also insures interest rate parity because this relationship prevents speculators from profiting by borrowing in a low interest rate country and simultaneously lending in a high interest rate country and hedging the currency risk. See also Arbitrage, Interest Rate Parity. See Forward Discount.
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Glossary *
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