A straightforward currency swap in which the two counterparties simultaneously exchange currencies at the spot and forward rates. This swap is an attempt to capitalize on the interest rate differential between two countries (arbitrage) and at the same provides a cover for currency risk. The arbitrage process tends to force a relationship between interest rate differentials and forward rate premiums. That is, covered interest arbitrage helps maintain interest rate parity, since the relationship prevents speculators from making a risk-free profit by borrowing in a low interest rate country and simultaneously lending in a high interest rate country.
