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This paper deals with the effects of transaction costs on the efficacy of oneway arbitrage under the linked exchange rate system during the period of January to April 1990 in the Hong Kong foreign exchange market. Empirical findings have confirmed the co-integration of the forward premium and the interest rate differential in the long run. There exists small and short-lived profits for one-way arbitrage in the Hong Kong swap market. Our findings do give support to some of the findings by Deardorff and Clinton that the validity of the one-way arbitrage help reducing deviations from the covered interest parity.