on international capital flows 19 What is covered interest a

on international capital flows.
19. What is covered interest arbitrage? And what is ‘the cost of covering’?

Solution

ANSWER:

Covered interest arbitrage refers to an arbitrage trading strategy wherein investor uses a forward contract for hedging against exchange rate risk. An investor capitalizes on the interest rate differences among two nations by using a forward contract to invest in a currency that is higher-yielding, and hedging the exchange rate risk.

The cost of covering refers to the type of charges for covering the costs of environmental expenditures/services and abatement measures, such as water treatment. The level of a cost covering charge is computed usually by the service it is intended to deliver or the other motive to which its revenues will be put