International parity conditions approach Covered vs uncovered interest arbitrage Covered interest arbitrage:the profit is known with certainty (covered against exchange rate risk). Uncovered interest arbitrage:the profit depends on the future exchange rate. Uncovered interest arbitrage is risky since the future exchange rate is unknown (the actual exchange rate may turn out to be different from the expected exchange rate).International parity conditions approach Covered vs uncovered interest arbitrage Covered interest arbitrage: the profit is known with certainty (covered against exchange rate risk). Uncovered interest arbitrage: the profit depends on the future exchange rate. Uncovered interest arbitrage is risky since the future exchange rate is unknown (the actual exchange rate may turn out to be different from the expected exchange rate)