Suppose that the six$-$month interest rate in the United States is $5\%,$ while the six$-$month interest rate in Canada is $7\%.$ Further, assume the spot rate of the Canadian dollar is $$0\mathrm{.}50.$

Suppose that you have $$500,000$ with which to attempt covered interest arbitrage. Assume the forward rate is $$0\mathrm{.}49065,$ as you just calculated, and the interest rates are the same as have been used throughout this problem.

To start, you exchange your $$500,000($at the spot rate of $$0\mathrm{.}50)$ for $1,000,000$ Canadian dollar. After depositing these funds for $6$ months, and earning a return of $7\%,$ your deposit grows to $1,070,000$ Canadian dollar.

When you convert your $1,070,000$ Canadian dollar back to dollars, you end up with approximately $-$ for a profit of about over your original $$500,000.$

However, had you simply deposited your $$500,000$ in an account and accrued $5\%$ interest, you would have for a profit of

This example illustrates that covered interest arbitrage offer a significantly larger return than simply depositing the funds in a domestic account under interest rate parity.