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. Interest Rate Differential - IRD

    A differential measuring the gap in interest rates between two ...
  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. Investing

    Bond Spreads: A Leading Indicator For Forex

    Here we examine some telling patterns in the relation between countries' interest rates and their currency pairs.
  2. Investing

    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.
  3. Trading

    How To Borrow For Free

    People will do anything to get a little extra money. If you need some cash, here are some ways you can borrow without much hassle.
  4. Trading

    8 Basic Forex Market Concepts

    We go over some of the things you need to understand before you can trade currencies.
  5. 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.
  6. Personal Finance

    How Banks Set Interest Rates on Your Loans

    Many factors go into how banks set interest rates for loans. Use this information to negotiate the best possible rate when you're borrowing.
  7. Investing

    Forces Behind Interest Rates

    Interest is a cost for one party, and income for another. Regardless of the perspective, interest rates are always changing.
  8. Trading

    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 ...
  9. Trading

    Currency Carry Trades 101

    This strategy can provide returns even if the currency pair doesn't move a cent.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. What are the similarities between product differentiation and product positioning?

    Learn how two marketing strategies, product differentiation and product positioning, are similar and work together to effectively ... Read Answer >>
  4. What is the difference between real and nominal interest rates?

    Learn what nominal interest rates and real interest rates are, how real interest rate takes into account the inflation rate, ... 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 >>
Hot Definitions
  1. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  2. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  3. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  4. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  5. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  6. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
Trading Center