Question

Please use the real world data to create a case of the Rectangular arbitrage(Covered Interest arbitrage).

Answer 1

• As described by interest rate parity, the spot and forward exchange rates are not, however, constantly in the state of equilibrium.

• The potential for “risk-less” or arbitrage profit exists, when the market is not in equilibrium.

• The arbitrager will exploit the imbalance by investing in whichever currency offers the higher return on a covered basis. This is known as covered interest arbitrage (CIA).