Arbitrage Investors
Arbitrage Investors: Interest Rate Risk Exposure refers to the interest rate differential between the two countries’ currencies in a foreign exchange contract.
The interest rate differential is also roughly equal to the “carry” cost paid to hedge a forward or futures contract.
As a side note, arbitragers are investors that take advantage when interest rate differentials between the foreign exchange spot rate and either the forward or futures contract are either to high or too low.
In simplest terms, an arbitrager may sell when the carry cost he or she can collect is at a premium to the actual carry cost of the contract sold.
Conversely, an arbitrager may buy when the carry cost he or she may pay is less than the actual carry cost of the contract bought.
Either way, the arbitrager is looking to profit from a small price discrepancy due to interest rate differentials.
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