how uncovered interest arbitrage works
uncovered interest arbitrage involves an unhedged exchange of currencies in an effort to earn higher returns due to an interest rate differential between the two currencies total returns from uncovered interest arbitrage depend considerably on currency fluctuations since adverse currency movements can wipe out all the gains and in fact even lead to negative returns if the interest rate differential obtained by investing in a foreign currency is 3 and the foreign currency appreciates against the domestic currency by 2 during the holding period the total return from this arbitrage activity is 5 on the other hand if the foreign currency depreciates by 4 during the holding period the total return is 1 