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.

Covered Interest Arbitrage

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.

covered interest arbitrage

the borrowing and investing of foreign currencies to take advantage of differences in INTEREST RATES between countries. For example, a company could borrow an amount of one currency (say, the UK pound (£)), convert this into another currency (say, the US dollar ($)) and invest the proceeds in the USA. Concurrently, the company would sell $s for £s in the FORWARD MARKET for delivery at a future specified date. The company would earn a profit on such a transaction if the rate of return on its investment in the USA was greater than the combined expenses of interest payments on the amount of £s borrowed and the costs of concluding the forward exchange contract. Covered interest ARBITRAGE takes advantage of (and in the process eliminates) any temporary discrepancies between relative interest rates in two countries and the forward exchange rate of the two countries' currencies.

covered interest arbitrage

the borrowing and investing of foreign currencies to take advantage of differences in INTEREST RATES between countries. For example, a company could borrow an amount of one currency (say, the UK pound (£)), convert this into another currency (say, the US dollar ($)) and invest the proceeds in the USA. Concurrently, the company would sell $s for £s in the FUTURES MARKET for delivery at a future specified date. The company would earn a profit on such a transaction if the rate of return on its investment in the USA were greater than the combined expenses of interest payments on the amount of £s borrowed and the costs of concluding the forward exchange contract. Covered interest ARBITRAGE takes advantage of (and in the process tends to eliminate) any temporary discrepancies between relative interest rates in two countries and the forward exchange rate of the two countries’ currencies. See INTERNATIONAL FISHER EFFECT.
References in periodicals archive ?
The presented data show how the models fail to account for the excess returns from interest rate differentials (Atkeson & Kehoe, 2007) because based on interest rate parity covered interest arbitrage is not possible.
Therefore to gain from a covered interest arbitrage, a British investor must simultaneously buy dollars in the spot market and sell dollars in the forward market.
This study does an empirical test of the interest rate parity between the United States and selected emerging Asian economies of Malaysia, Korea, Singapore, Pakistan, India, Thailand and Philippines, and explores opportunity for covered interest arbitrage.
If the above equation does not hold then we would conclude that one can gain from covered interest arbitrage.
However, in most studies involving covered interest arbitrage the transaction cost is usually ignored.
and emerging Asian economies holds in the long run, nevertheless, an intelligent investor may be able to identify certain time periods when there might be opportunity for covered interest arbitrage.
A classroom exercise to simulate triangular and covered interest arbitrage.
The theoretical forward rate may be observed in the currency markets where there are no obvious covered interest arbitrage opportunities.
and other industrialized countries, and therefore there is no opportunity for covered interest arbitrage for U.
Therefore to gain in a covered interest arbitrage a British investor must simultaneously buy dollar in the spot market and sell dollar in the forward market.
The purpose of this paper is to explore the possibilities of covered interest arbitrage between U.
Secondly, it is compared whether excess return is possible with covered interest arbitrage between U.