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Got it. Thanks.

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It is simple carry trade in FX .

From the perspective of the Domestic trader:

Sell forward FC , so you have a delivery commitment for FC for a future period.

1.You borrow FC , convert to DC at the spot , pay the FC interest rate on borrowed FC.

2. Invest DC . Earn the DC interest rate on invested amount.

3. At the expiry of the forward , convert enough DC (DC now higher because of interest accumulated ) to FC at the then spot (lower spot, but more DC to convert ) and use the FC to deliver on the forward.


Since FC has fallen over the period , the trade will work , if the market expected fall was less than your expectation i.e. the realized fall in spot is worse than market was projecting.

The no-arb case would be earning on the spot differential = loss on the interest rate differential , leaving neither party at a loss.

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