Question

if the difference in interest rates is greater than the forward premium/discount, or expected change in the spot rate for uia(uncovered interest arbitrage), invest in the higher interest yielding currency. if the difference in interest rates is less than the forward premium (or expected change in the spot rate), invest in the lower yielding currency. ture/false? a. true b. false

Answer 1

Both claims are true.

Invest in the currency with the higher interest yield if the difference between the interest rates is more than the forward premium (or anticipated change in the spot rate).

Invest in the currency with the lower interest yield if the difference between the interest rates is smaller than the forward premium (or anticipated change in the spot rate).

A forward contract is used by the investor in covered interest arbitrage to protect themselves against currency risk. Using advantageous interest rate differentials to invest in a currency that pays a higher yield while hedging the exchange risk using a forward currency contract is known as covered interest rate arbitrage.

Returns on covered interest rate arbitrage typically aren't very high, especially in markets with high levels of competition or little information asymmetry. This is due in part to the development of contemporary communications technology. Due to slower information flows, research shows that covered interest arbitrage was substantially stronger between GBP and USD during the gold standard era.

Learn more about arbitrage at

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