uncovered interest arbitrage
A type of carry trade transaction where a trader exchanges their low interest rate domestic currency for a higher interest rate foreign currency to place it on deposit in the foreign country. The trader using uncovered interest arbitrage will benefit from the interest rate differential, as well as favorable moves in the forex rate if their domestic currency depreciates relative to the foreign currency. Nevertheless, this is not a true arbitrage since it does not lock in a profit and risk exists if the foreign currency falls in value relative to the domestic currency. also called a carry trade.