Abstract
The paper examines empirically a well-established relationship between forward premium and interest rate differential in international finance, covered interest rate parity (CIP). More specifically, a cointegration-based approach is employed to test CIP in two different exchange rates against USD, namely GBP/USD and SEK/USD, by using monthly data and Euro rates for a period of almost 15 years. Findings suggest the validity of CIP in the case of GBP/USD for both three-month and six-month maturities. On the contrary, the empirical analysis of SEK/USD does not provide any evidence for accepting the theoretical framework. An important point is that research presents the existence of systematic, small-scale deviations from parity, a finding that can be attributed to the modelling of transaction costs.
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