Covered Interest Rate Parity Essay by Research Group

This paper discusses the theory of covered interest rate parity which states that the prices from risk free assets with identical maturity should be equated across countries, after translation into a common currency. In other words, a risk free asset should cost the same dollar amount whether purchased in $US or some other currency. It tests the theory by analyzing empirical evidence to test whether the theory has held over the eighteen year period, 1980 to 1998. All the data used in empirical testing is presented in the appendix.