What is an arbitration covered?

The covered arbitration procedure is a financial strategy to minimize the risk of foreign investment. If the return rate of secure investment is higher on the foreign market, the investor can transfer the amount of the currency at today's exchange rate to invest there. At the same time, the investor would sell an investment contract plus its expected return back to his domestic currency. This contract, called Forward Contract, locks the future currency conversion and removes the risk of changing exchange rate changes. The return on investment must be paid in full at the same date as the forward sales of the currency to make this strategy effective. There is also a possibility that there may be a more favorable exchange rate at the time of payment of the investment. In general, however, it is considered to be more cautious to ensure a guaranteed return rate than to take unnecessary risk of hope. One of them is the difference between the current or place, the measure of shift between two currencies and the pre -pre -pre -rate rate. Another is the difference in interest ratesbetween two countries.

Generally, there is an opportunity to make a profit of covered interest in one of two scenarios. First of all, the difference in interest rates between two countries is less than the difference between the exchange rates of the spot and in advance expressed as a transfer rate. In this situation, the investor should lend money in a country with a higher interest rate and invest in a country with a lower interest rate.

In the second scenario, the interest is differentiated is greater than the difference between the exchange rates of the spot and in advance written as a percentage of the handover rate. The investor who has seen this situation should borrow in a country with a lower interest rate and invest money in a country with a higher interest rate. In both scenarios would be a profit invested the amount plus a return, a less borrowed amount plus the amount of interest.

In the state of interest rate parity, change of exchange and interest rates. Revenues from domestic and foreign investment in the sameThe financial instruments would be equal. When this condition exists, the investment environment without arbitration prevails. Investments in foreign markets are not beneficial to obtain and no reason to practice covered interest.