Covered Interest Arbitrage

Covered Interest Arbitrage (CIA) is a foreign exchange trading strategy that exploits the interest rate differential between two countries by simultaneously borrowing in the low-interest currency, investing in the high-interest currency, and hedging the exchange rate risk with a forward contract. This strategy is predicated on the theoretical concept of Covered Interest Parity (CIP), which posits that the forward exchange rate should perfectly offset the interest rate differential, thereby eliminating arbitrage opportunities in an efficient market.