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Uncovered interest arbitrage

Uncovered interest arbitrage is a form of arbitrage where funds are transferred abroad to take advantage of higher interest in foreign monetary centers. It involves the conversion of the domestic currency to the foreign currency to make investment; and subsequent re-conversion of the fund from the foreign currency to the domestic currency at the time of maturity. A foreign exchange risk is involved due to the possible depreciation of the foreign currency during the period of the investment. Uncovered interest arbitrage is a similar strategy to covered interest arbitrage. The difference is that the currency risk is not hedged, so it is not a true arbitrage strategy.



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