What is Uncovered Interest Arbitrage?

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Accepted Answer

Uncovered Interest Arbitrage (UIA) is an investment strategy in foreign exchange markets where an investor borrows funds in a low-interest-rate currency, converts them to a high-interest-rate currency to invest, and omits the use of a forward contract to hedge the exchange rate risk, thereby speculating on the future spot exchange rate. This strategy is "uncovered" because the potential profit is subject to the volatility of the spot exchange rate at the time the investment matures.

Uncovered Interest Arbitrage

What is Uncovered Interest Arbitrage?

What is the fundamental mechanism of Uncovered Interest Arbitrage (UIA) and how does it differ from Covered Interest Arbitrage (CIA)?

How does Uncovered Interest Rate Parity (UIRP) relate to UIA, and why is UIA a speculative strategy?

What are the primary risks associated with Uncovered Interest Arbitrage, and how can adverse exchange rate movements negate the interest gain?

Under what macroeconomic conditions does Uncovered Interest Arbitrage become a popular strategy, and how do "risk-off" events impact its profitability?

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