Covered Interest Arbitrage

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Covered interest arbitrage

Occurs when a portfolio manager invests dollars in an instrument denominated in a foreign currency and hedges the resulting foreign exchange risk by selling the proceeds of the investment forward for dollars.

A strategy in which one enters a long position in an investment in a foreign currency and simultaneously enters a short position in a forward contract on that same currency. The amount one receives in the sale of the forward contract should equal what one spends on the long investment in the base currency. One enters the short position in order to hedge the exchange risk.

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