Let’s compare the profit you get here with and without hedging the rate, assuming everything else holds. After going through the covered interest arbitrage strategy in the USA, you’ll have €101,276.60. If you didn’t hedge, you would have €102,000, as mentioned before. So why do people hedge if it leads to fewer profits?
Primarily, traders hedge to avoid the risk of fluctuations in the exchange rate. A currency pair will rarely stay stable over a year. So while the profit is €723.40 less, we’ve managed to at least guarantee €1,276.60. Another factor is that we assume that the central bank won’t change the interest rate over the year, which is not always the case.