Interest rate arbitrage refers to a method of making a profit by using the difference in interest rates in the two places. An arbitrage is a spread or difference in price between two markets or exchanges for a particular security, currency, or commodity. For instance, in the bond market, an arbitrage bond is the refinancing of a bond with higher interest rate with a bond having lower interest rate prior to the higher interest rate bond's maturity date. Interest rate arbitrage doesn't work without a risk. Risks include foreign exchange controls, differing tax treatment, transaction costs, supply or demand inelasticity, slippage during execution.