# Interest Rate Differential - IRD

- A differential measuring the gap in interest rates between two similar interest-bearing assets. Traders in the foreign exchange market use interest rate differentials (IRD) when pricing forward exchange rates. Based on the interest rate parity, a trader can create an expectation of the future exchange rate between two currencies and set the premium (or discount) on the current market exchange rate futures contracts.
The IRD is a key component of the carry trade. For example, say an investor borrows US$1,000 and converts the funds into British pounds, allowing the investor to purchase a British bond. If the purchased bond yields 7% while the equivalent U.S. bond yields 3%, then the IRD equals 4% (7-3%). The IRD is the amount the investor can expect to profit using a carry trade. This profit is ensured only if the exchange rate between dollars and pounds remains constant.

*Investment dictionary.
Academic.
2012.*

### Look at other dictionaries:

**Interest Rate Differential**— The difference in yield between two comparable instruments denominated in different currencies. Used in forward foreign exchange pricing. * * * interest rate differential UK US noun [C] FINANCE ► the percentage difference in the interest rate… … Financial and business terms**Net Interest Rate Differential**— In international markets, the difference in the interest rates of two distinct economic regions. If a trader is long the NZD/USD pair, he or she owns the New Zealand currency and borrows the US currency. These New Zealand dollars can be placed… … Investment dictionary**Interest rate parity theorem**— Interest rate differential between two countries is equal to the difference between the forward foreign exchange rate and the spot rate. The New York Times Financial Glossary … Financial and business terms**Interest Rate Parity**— A theory in which the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. Interest rate parity plays an essential role in foreign exchange markets, connecting … Investment dictionary**interest rate**— / ɪntrəst reɪt/ noun a figure which shows the percentage of the capital sum borrowed or deposited which is to be paid as interest. Also called rate of interest ▪▪▪ ‘…since last summer American interest rates have dropped by between three and four … Dictionary of banking and finance**interest rate parity theorem**— Expression that the interest rate differential between two countries is equal to the difference between the forward foreign exchange rate and the spot rate. Bloomberg Financial Dictionary … Financial and business terms**Interest rate swap**— An interest rate swap is a derivative in which one party exchanges a stream of interest payments for another party s stream of cash flows. Interest rate swaps can be used by hedgers to manage their fixed or floating assets and liabilities. They… … Wikipedia**differential**— A small charge added to the purchase price and subtracted from the selling price by the dealer for odd lot quantities. Bloomberg Financial Dictionary * * * ▪ I. differential dif‧fe‧ren‧tial 1 [ˌdɪfəˈrenʆl◂] noun [countable] the amount of… … Financial and business terms**interest**— / ɪntrəst/ noun 1. special attention ● The buyers showed a lot of interest in our new product range. 2. payment made by a borrower for the use of money, calculated as a percentage of the capital borrowed ■ verb to attract someone’s attention ●… … Marketing dictionary in english**rate**— n 1: a fixed ratio between two things 2: a charge, payment, or price fixed according to a ratio, scale, or standard: as a: a charge per unit of a commodity provided by a public utility b: a charge per unit of freight or passenger service see also … Law dictionary**differential swap**— swap between two LIBOR rates of interest ( interest rate), e.g., yen LIBOR for dollar LIBOR Payments are in one currency. Bloomberg Financial Dictionary … Financial and business terms