Due to , market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies. forward realignment arbitrage triangular arbitrage covered interest arbitrage locational arbitrage

Covered Interest Arbitrage

Explanation:

The Covered Interest Arbitrage is a term that refers to arbitrage trading approach in which a stockholder take the chance to gain advantage from the disparity in interest rate between two nations.

The trading strategy helps in its verifiability, quantifiability, consistency, and objectivity

It is designed to profit the investor from the differences in interest rates between two countries, when buying and selling foreign currencies.

When a market is small or there's a high level of competition, there's a possibility that the earnings on covered interest rate arbitrage won't yield much.