inttrest arbitrage for mba

1. INTEREST ARBITRATION
• Arbitrage is taking advantage of price difference for the same good in different
market by buying low in one market and selling high in another market.
• Interest arbitration is the variation in interest rate between countries based on
their current economic cycle which create opportunities for investors.
• There are two types of interest arbitration they are
• Covered Interest Arbitration
• Uncovered Interest Arbitration

2. COVERED INTEREST ARBITRATION
• Covered Interest Arbitration is used when the investors capitalises on interest
rate differential between two countries using a forward contract to cover
exchange rate risk.
• This form of arbitrage is complex and offers low returns on a per-trade basis.
But trade volumes have the potential to inflate returns.
• It assumes no opportunity for arbitrage using forward contracts.
• Covered and uncovered interest rate parity are the same when forward and
expected spot rates are the same.

3. CIA FORMULA
• (1+id)= (S/F)∗(1+if )
• id=The interest rate in the domestic currency or the base currency
• if=The interest rate in the foreign currency or the quoted currency
• S=The current spot exchange rate
• F=The forward foreign exchange rate