If you 1) borrow currency A at A’s short-term interest rate; 2) sell A and buy currency B at the currency spot rate; and 3) lend currency B at B’s short-term interest rate; there will be a forward currency spot rate for selling B and repurchasing A that will equilibrate the net borrowing and lending costs over time. A trader who can lock in this forward rate today at a price of either selling B for more or buying A for less will have a riskless, or arbitrage, profit.

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