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why does the risk of uncovered intrest arbitrage investing is different from the risk of covered...

why does the risk of uncovered intrest arbitrage investing is different from the risk of covered interest arbitrage investment

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The risk of uncovered interest arbitrage investing is more than the risk of covered interest arbitrage investment because of no hedging involved in uncovered interest arbitrage investing. The covered interest arbitrage investing involves the hedging of foreign exchange risk with the use of forward contracts. In uncovered interest arbitrage investing; an investor exploits the interest rate disparity between two countries without hedging the risk but it becomes too risky if the interest rates goes in unfavorable direction. Therefore investors are exposed to higher risk in uncovered interest arbitrage investing activities in comparison of covered interest arbitrage investment.

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