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This study employs the conventional Uncovered Interest Parity (UIP) equation to test the validity of the theory
for Nigeria vis-à-vis the United States of America. The study also examine the causality relationship existing
between the variables in the UIP model. The results reveal the invalidity of the UIP theory for Nigerian Naira/
United States dollar exchange rates. We hereby conclude that the existence of abnormal profits from interest
arbitrage means that the Uncovered Interest Parity between Nigeria and the U.S.A did not hold in reality at some
points in time within the period under review. However, the reasons for the failure of UIP theory for Nigeria
might be that the capital mobility between the countries is not perfect, or the risk premium in Nigeria is high as
perceived by the potential investors. Country risk, which includes political risk and economic risk remain higher
for developing countries including Nigeria, than for the developed countries.
