Interest Rate Differential - IRD

AAA

DEFINITION of '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.

INVESTOPEDIA EXPLAINS 'Interest Rate Differential - IRD'

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.

RELATED TERMS
  1. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  2. Negative Carry Pair

    A forex trading strategy in which a long position is held on ...
  3. Uncovered Interest Arbitrage

    A form of arbitrage that involves switching from a domestic currency ...
  4. Vasicek Interest Rate Model

    A method of modeling interest rate movement that describes the ...
  5. Forex - FX

    The market in which currencies are traded. The forex market is ...
  6. Currency Carry Trade

    A strategy in which an investor sells a certain currency with ...
Related Articles
  1. Forex Education

    Making Sense Of The EUR/CHF Relationship

    The strong correlation between EUR and CHF currency pairs is undeniable. Find out what it means for forex traders.
  2. Forex Education

    Profiting From Carry Trade Candidates

    Capitalize on the yield of the interest rate differential by using flags and pennants.
  3. Forex Education

    Make The Currency Cross Your Boss

    Tap into a world of possibilities by going beyond the simple pro- or anti-dollar trade.
  4. Options & Futures

    Bond Spreads: A Leading Indicator For Forex

    Here we examine some telling patterns in the relation between countries' interest rates and their currency pairs.
  5. Forex Education

    Range Trade Forex With Non-U.S. Dollar Pairs

    If you are following a range-trading strategy, you're better off with pairs that do not include the U.S. dollar. Find out why.
  6. Forex Strategies

    How do I implement a forex strategy when spotting a Three White Soldiers Pattern?

    Learn two variations, one aggressive, one more conservative, of a forex trading strategy that can be used with the three white soldiers candlestick pattern.
  7. Forex Strategies

    How do I implement a forex strategy when spotting a Runaway Gap Pattern?

    Read about some strategies to consider after spotting a runaway gap pattern in the forex market, including how to distinguish them from exhaustion gaps.
  8. Forex Strategies

    How do I implement a forex strategy when spotting a Rounding Top Pattern?

    Learn an aggressive forex trading strategy that can be implemented when a trader recognizes a rounding top pattern signaling a bearish trend reversal.
  9. Investing Basics

    The Strange New World Of The Bitcoin Exchange Futures Market

    We explain the basics of the Bitcoin exchange and futures market.
  10. Forex Strategies

    How do I use Relative Vigor Index (RVI) to create a forex trading strategy?

    Learn a forex trading strategy designed to maximize trend trading profits by using the Relative Vigor Index in conjunction with other technical indicators.

You May Also Like

Hot Definitions
  1. Prospectus

    A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details ...
  2. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  3. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  4. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  5. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  6. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
Trading Center