Covered interest arbitrage

Covered interest arbitrage occurs when a fund manager invests a particular currency, say US dollars, into an instrument denominated in another currency (a stock, bond, or any financial mechanism). The manager then hedges the foreign exchange risk, associated with that instrument, by selling the proceeds of the investment forward: selling futures of that currency in exchange for the original currency (US dollars).

Example

$1,350,000 US exchanged for 1,000,000€

(Buys) 1,000,000€ worth of Euro bonds

(Sells) futures for 1,000,000€ in exchange for $1,350,000 US