Investment Analysis:Covered Interest Arbitrage

Research Paper (postgraduate) from the year 2018 in the subject Business economics - Investment and Finance, grade: Pass, course: Level 7 Diploma in Accounting and Finance, language: English, abstract: Interest rate arbitrage refers to the mechanism in which an investor strategises to profit from differences in interest rates between two countries or financial markets. However, the investor may be taking a risk due to the uncertainties of future currency exchange rates. When the investor incorporates an aspect of hedging while practicing interest rate arbitrage, he is assured to pocket a riskless profit. The term covered interest arbitrage is used to describe the form of interest arbitrage where currency exchange has been hedged using derivative instruments. The investor, therefore, makes simultaneous spot and forward transactions (Fong, Valente & Fung, 2010).