With a relatively short history, long-term Won/Dollar Currency Swapping has been elevated by the demand for hedging foreign exchange risk and the increase of domestic investors’ assets in foreign currencies since the IMF bail-out. This thesis analyzes the Long-term Won-Dollar Swap Market through the deviations from Covered Interest Parity (CIP). These deviations can be explained by transaction costs in the financial markets of developed countries. Also, this thesis examines determinants of covered interest arbitrage in the market. Empirical results suggest that low negative mean deviations from CIP in all sample maturities are observed without consideration of transaction costs, and deviations in excess of transaction costs as a proxy for anomalies, also appear in almost all sample periods with 35bp of mean deviations obtained by the homoskedastic Tobit model. Using a time series plot of the deviations in excess of transaction costs, it is found that the deviations do not diminish over time, but some gaps outside the neutral band exists in the market. Using a multi-regression model with independent variables of the country credit risk spread, the interest rate difference between the U.S Dollar and Korean Won, and the Won/Dollar foreign exchange rate volatility against Covered Interest Arbitrage(CIA), it is also understood that the CIAs are positively related with the interest rate difference between the currencies and the foreign exchange rate volatility at a statistically conventional significant level, and they seem to be positively related with the country credit risk spread at a relatively low confidence level.
