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.