Net Interest Rate Differential

Glossary

Banking

Net Interest Rate Differential

Net interest rate differential is the difference in interest rates associated with two different currencies or two different economic regions. In currency markets, the net interest-rate differential is the difference between countries’ interest rates. For FX traders in a pairs trade, the NIRD is the gross income generated from holding one currency less the gross interest paid on the currency borrowed to fund the trade. The net interest-rate differential is the critical component of carry trades – borrowing in a low-interest currency to invest in a high-interest-paying currency.

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