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Uncovered Interest Arbitrage
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The notion that the forward exchange rate is an unbiased estimate of the future spot rate. Uncovered interest arbitrage assumes that, on average, an investor who borrows in a low interest rate country, converts the funds to the currency of a high interest rate country, and lends in that country will not realize a profit or suffer a loss. It follows from uncovered interest arbitrage that the expected return of a forward contract equals 0 percent. See also Forward Rate Bias.
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Glossary *
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