Interest parity in international financial markets exists when the interest rate differential between two counties is exactly offset by the forward exchange premium/discount. If at any moment the interest parity condition is not satisfied, traders can execute covered interest arbitrage. Covered interest arbitrage entails a series of four transactions in the currency and securities markets which results in a practically riskless profit. Although traditional economic theory predicts that the opportunities will be wiped out as individuals take advantage of the situation, covered interest. arbitrage margins (ClAMs) have been observed to exist over extended periods of time.



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