What is Covered Interest Arbitrage?

Legal Definition
Covered interest arbitrage is an arbitrage trading strategy whereby an investor capitalizes on the interest rate differential between two countries by using a forward contract to cover (eliminate exposure to) exchange rate risk. Using forward contracts enables arbitrageurs such as individual investors or banks to make use of the forward premium (or discount) to earn a riskless profit from discrepancies between two countries' interest rates. The opportunity to earn riskless profits arises from the reality that the interest rate parity condition does not constantly hold. When spot and forward exchange rate markets are not in a state of equilibrium, investors will no longer be indifferent among the available interest rates in two countries and will invest in whichever currency offers a higher rate of return. Economists have discovered various factors which affect the occurrence of deviations from covered interest rate parity and the fleeting nature of covered interest arbitrage opportunities, such as differing characteristics of assets, varying frequencies of time series data, and the transaction costs associated with arbitrage trading strategies.
-- Wikipedia
Legal Definition
An ARBITRAGE transaction that takes advantage of any instance when the FORWARD PREMIUM or FORWARD DISCOUNT between two currencies does not equal the INTEREST RATE DIFFERENTIAL. When this occurs, ARBITRAGEURS can use covered interest arbitrage to generate profits until the relationships return to equilibrium. This may be done by buying one currency in the SPOT MARKET and simultaneously selling it in the FORWARD MARKET and using the spot proceeds to invest in an asset denominated in the spot currency; when the asset matures, the proceeds are used to fulfill the forward contract and the arbitrage transaction concludes with a riskfree profit.