Interest arbitrage, also known as arbitrage, refers to a transaction in which investors borrow funds from countries with lower interest rates according to the short-term interest rates in the financial markets of the two countries, convert them into the currencies of countries with higher interest rates in the spot foreign exchange market, invest in the countries, or directly transfer the free funds from countries with lower interest rates to countries with higher interest rates to earn spread income. According to whether the foreign exchange risks involved in arbitrage transactions are offset, arbitrage can be divided into covered interest arbitrage and covered interest arbitrage. Carry arbitrage refers to the transfer of funds from a currency with low interest rate to a currency with high interest rate, so as to earn income from the spread, but at the same time, there is no need for reverse trading to close the position. This arbitrage bears the risk of devaluation of high interest rate currencies and is speculative. Suppose that in China, the annual interest rate of one-year treasury bonds is 3%, while that of American one-year treasury bonds is 5%. At that time, the exchange rate of USD against RMB in the spot foreign exchange market was 7.76 RMB/USD. If an enterprise wants to invest its temporarily idle funds 1 ten thousand dollars 1 year. Then it now faces two choices. First, convert US dollars into RMB in China and buy domestic treasury bills, then you can receive RMB 7,792,800 with interest at maturity. The second is to invest 1 10,000 dollars in the US Treasury bond market, and the interest of10.05 million dollars can be recovered at maturity. The quality of these two investment options depends on the spot exchange rate of USD against RMB in the foreign exchange market when the investment term expires. If the exchange rate is kept at 7.76, the enterprise can make a profit of 355,200 yuan by converting the income from the US Treasury bond market into RMB 8,654,380+0,480 yuan. However, after 1 year, it is impossible to maintain the exchange rate in the foreign exchange market at the original level. In other words, the spot exchange rate at the time of investment maturity is often the same as the spot exchange rate at the time of investment, rising and falling. If the exchange rate at the end of the investment is 7.86 RMB/USD, that is, the USD appreciates, then the USD investment recovered in this way (6,543,800 USD+0,500 USD) can be converted into 8,253,000 RMB. In addition to interest income, investors can also earn some foreign exchange income. However, according to the actual foreign exchange market, under normal circumstances, the currencies of countries with higher interest rates tend to fall, while the currencies of countries with lower interest rates tend to rise. Therefore, if the exchange rate falls below 7.42, investors will convert their gains in the US market into RMB less than their direct investment in China. In short, because of the uncertainty of exchange rate in carry arbitrage, the result is also uncertain. Carry arbitrage refers to borrowing a currency at a lower interest rate, converting it into a country's currency with a higher interest rate through spot foreign exchange transactions and investing it to earn spread income. At the same time, in order to prevent the risk of exchange rate changes during the investment period, this arbitrage is usually combined with swap transactions, that is, the cost of buying cash and selling foreign exchange in swap transactions is deducted from the higher interest income to earn a certain profit. Assume that in the domestic foreign exchange market, the spot exchange rate of RMB against USD is 1 USD = 7.76-7.78 RMB, and the predicted one-year exchange rate is 1 USD = 7.68-7.70 RMB. The one-year interest rate in the United States is 5.25%, and the domestic interest rate is 3.06%. Suppose a foreign-funded enterprise buys $6,543,800+in cash in the US market and deposits it in the Bank of America to collect interest. At the same time, it sold one-year foreign exchange of USD 6,543,800+to prevent the risk of exchange rate changes. Swap cost: cash purchase 1 10,000 USD and payment of 7.78 million RMB. Sold one-year foreign exchange of 6,543,800 USD and earned 7,680,000 RMB. The swap cost is 654.38+ten thousand yuan. Interest revenue and expenditure: interest income100× 5.25 %× 7.68 = 403,200 yuan, interest cost 778×3.06% = 238 1 10,000 yuan, so the net interest income is 16.5 1 10,000 yuan. The net arbitrage income is equal to the net interest income MINUS the swap cost, that is, 65,654,38+0,000 yuan. It can be seen that carry arbitrage can be used to arbitrage according to the difference of interest rates even if the exchange rate situation of a certain currency is not optimistic at present, and a certain income can be obtained.