Net Interest Rate Differential

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.

BREAKING DOWN '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. NZD/USD (New Zealand Dollar/U.S. ...

    The abbreviation for the New Zealand dollar and U.S. dollar (NZD/USD) ...
  2. Reserve Bank Of New Zealand

    The Reserve Bank of New Zealand is New Zealand's central bank ...
  3. NZD (New Zealand Dollar)

    The currency abbreviation or currency symbol for the New Zealand ...
  4. New Zealand Stock Exchange (NZE) ...

    The securities market in New Zealand. The New Zealand Stock Exchange ...
  5. Interest Rate Parity

    A theory in which the interest rate differential between two ...
  6. Funding Currency

    The currency being exchanged in a currency carry trade. A funding ...
Related Articles
  1. Forex Education

    Explaining Uncovered Interest Rate Parity

    Uncovered interest rate parity is when the difference in interest rates between two nations is equal to the expected change in exchange rates.
  2. Retirement

    Are You Rich Enough to Retire in New Zealand?

    New Zealand is beautiful and welcoming to retirees – but only if they bring a healthy bank account. See how you measure up.
  3. Investing Basics

    Explaining Interest Rate Parity

    Interest rate parity exists when the expected nominal rates are the same for both domestic and foreign assets.
  4. Credit & Loans

    All Your Questions About Loan Interest Rates

    If you think interest rates don’t really matter -- think again. Interest rates have a huge impact on your finances.
  5. Forex Education

    Interest Rate and Currency Value And Exchange Rate

    In general, higher interest rates in one country tend to increase the value of its currency.
  6. Investing Basics

    How Banks Set Interest Rates On Your Loans

    On the face of it, figuring out how a bank makes money is a pretty straightforward affair. A bank earns a spread on the money it lends out from the money it takes in as a deposit. The net interest ...
  7. Forex Strategies

    The Money Market Hedge: How It Works

    Investopedia explains how to hedge foreign exchange risk using the money market, the financial market in which highly liquid and short-term instruments like Treasury bills, bankers’ acceptances ...
  8. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  9. Forex Education

    Understanding Forex Rollover Credits And Debits

    Forex trades are subject to receiving interest or being debited interest if positions are held overnight.
  10. Economics

    Forces Behind Interest Rates

    Interest is a cost for one party, and income for another. Regardless of the perspective, interest rates are always changing.
RELATED FAQS
  1. What is the name of the currency in New Zealand?

    The New Zealand currency is known as the New Zealand dollar. The currency was decimalized in 1967, and divided into 100 parts ... Read Answer >>
  2. How is rollover interest calculated?

    In the forex market, all trades must be settled in two business days. Traders who want to extend their positions without ... Read Answer >>
  3. How do changes in national interest rates affect a currency's value and exchange ...

    Understand the role that changes in interest rates can play in determining the value and foreign exchange rate of a country's ... Read Answer >>
  4. What does rollover mean in the context of the forex market?

    In the forex (FX) market, rollover is the process of extending the settlement date of an open position. In most currency ... Read Answer >>
  5. Why do forex traders use a currency converter?

    All currencies are quoted in pairs - one country's currency against another country's currency. A currency converter is used ... Read Answer >>
  6. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center