Arbitrage has two kinds: 1, cover the cover arbitrage refers to arbitrageurs only USES two kind of different with different interest spreads, and interest rates low currency conversion into higher interest rates money to earn profits, when to buy or sell a currency at sight, not sell or buy this kind of long-term inflation at the same time, the risk of the change.
In the non-covering carry trade, the direction of capital flow is mainly determined by the non-covering spread.
2. Offset arbitrage Offset arbitrage refers to that in order to avoid the risk of exchange rate changes, arbitrageurs convert the currency with a lower interest rate into the currency with a higher interest rate into the currency with a lower interest rate at the bank of the country with a higher interest rate or purchase the bonds of the country.
The direction of capital flow to offset arbitrage is not only determined by the interest rate difference between the two countries, but also by the interest rate difference between the two countries and the forward rate or discount rate of the country with high interest rate.
