interest arbitrage

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Transactions between financial centres in foreign currencies that take advantage of differentials in interest rates between the two centres and the difference between the forward and spot exchange rates. In some circumstances it is possible to make a profit by borrowing money on domestic markets at fixed rates, buying a foreign currency, lending the foreign currency at fixed rates, and entering into a forward contract to buy domestic currency. In general, however, this is not possible; the relation imposed on interest rates and exchange rates both spot and forward is described as the covered interest-rate parity.

Subjects: Financial Institutions and Services.

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