Net Interest Rate Differential

AAA

DEFINITION of '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 into a New Zealand bank while simultaneously taking out a loan for the same amount from the U.S. bank. The net interest rate differential is the difference in any interest earned and any interest paid while holding the currency pair position.

INVESTOPEDIA EXPLAINS 'Net Interest Rate Differential'

The net interest rate differential reveals the difference in interest rates offered between two countries. This differential is typically used to price currency forward contracts through the interest rate parity equation. A discrepancy between fundamental parity conditions and actual interest rates offered presents a currency arbitrage opportunity.



RELATED TERMS
  1. Paris Pair

    The nickname for the U.S. Dollar/French Franc currency pair prior ...
  2. Currency Carry Trade

    A strategy in which an investor sells a certain currency with ...
  3. Forex - FX

    The market in which currencies are traded. The forex market is ...
  4. Base Currency

    The first currency quoted in a currency pair on forex. It is ...
  5. Cross Currency

    A pair of currencies traded in forex that does not include the ...
  6. Currency Pair

    The quotation and pricing structure of the currencies traded ...
Related Articles
  1. A Primer On The Forex Market
    Options & Futures

    A Primer On The Forex Market

  2. Using Interest Rate Parity To Trade ...
    Options & Futures

    Using Interest Rate Parity To Trade ...

  3. Top 7 Questions About Currency Trading ...
    Forex Education

    Top 7 Questions About Currency Trading ...

  4. Bond Spreads: A Leading Indicator For ...
    Options & Futures

    Bond Spreads: A Leading Indicator For ...

comments powered by Disqus
Hot Definitions
  1. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  2. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  3. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  4. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  5. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
  6. Limit-On-Open Order - LOO

    A type of limit order to buy or sell shares at the market open if the market price meets the limit condition. This type of ...
Trading Center