This article empirically investigates the determinants of the deviations from fundamental levels of both the currency swap (CRS) and the interest rate swap (IRS) rates in Korea. This study also analyses the inter‐linkages between the swap and bond markets in Korea. To this end, a rolling VAR model is estimated incorporating the CRS rate, the IRS rate and the Korean Treasury bond (KTB) rate. It is found that hedging activities and risk factors are significant determinants of the deviations from fundamental levels of the IRS as well as the CRS rate in Korea. Moreover, the covered interest parity (CIP) deviation in the CRS market plays a role in explaining the deviation from the fundamental level of the IRS rate. There are contemporaneous links among the CRS rate, the IRS rate and the KTB rate, and a CRS rate shock significantly affects both the IRS and the KTB rates. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark