Explain the concept of covered interest arbitrage. Why does it occur?

What will be an ideal response?

Covered interest arbitrage is arbitrage that occurs when the difference between two countries' interest rates is not equal to the forward discount or premium on their currencies. It is considered to be the most important form of arbitrage in the foreign exchange market and occurs when international bankers, insurance companies, and corporate treasurers that scan money markets to obtain the best returns on their short-term excess cash balances and the lowest rates on short-term loans protect themselves from exchange rate risks.