Uncovered interest arbitrage (UIA) is a trading strategy that exploits the difference in interest rates between two countries while taking into account the potential fluctuations in exchange rates. Unlike covered interest arbitrage, which involves hedging against currency risk using financial instruments such as forward contracts, uncovered interest arbitrage does not involve hedging, making it inherently riskier. Here’s how it generally works: 1. **Interest Rate Differential**: Traders identify two currencies with a significant difference in interest rates.
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