Question: Define the terms covered interest arbitrage and uncovered interest arbitrage
Define the terms covered interest arbitrage and uncovered interest arbitrage. What is the difference between these two transactions?
Answer to relevant QuestionsExplain the difference between foreign currency options and futures and when either might be most appropriately used. Why would one company with interest payments due in pounds sterling want to swap those payments for interest payments due in U.S. dollars? You have the same information as in question 4 above, except that the pricing is for a European option. What is different? What is meant by the term “overshooting”? What causes it and how is it corrected? Ultimately a treasurer must choose among alternative strategies to manage transaction exposure. Explain the two main decision criteria that must be used.
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