Interest Rate Differential
Interest rate differential (IRD) is a term used to describe the difference between two interest rates, usually of two different currencies. It is used to measure the cost of borrowing one currency against another. The IRD is calculated by subtracting the interest rate of one currency from the interest rate of another. For example, if the interest rate of the US dollar is 2% and the interest rate of the Euro is 4%, then the IRD would be 2%.
History of Interest Rate Differential
The concept of interest rate differential has been around since the early days of currency trading. In the past, traders would use the IRD to determine which currency was more attractive to borrow. This allowed them to make more informed decisions about which currency to buy or sell. Today, the IRD is still used by traders to make decisions about which currency to buy or sell, as well as to measure the cost of borrowing one currency against another.
The IRD is also used by central banks to set their monetary policy. Central banks use the IRD to determine the cost of borrowing one currency against another, and to set their interest rates accordingly. This helps them to maintain a stable exchange rate between two currencies.
Table of Comparisons
| Currency | Interest Rate | IRD |
|---|---|---|
| US Dollar | 2% | 0% |
| Euro | 4% | 2% |
| British Pound | 3% | 1% |
Summary
Interest rate differential (IRD) is a term used to describe the difference between two interest rates, usually of two different currencies. It is used to measure the cost of borrowing one currency against another. The IRD is calculated by subtracting the interest rate of one currency from the interest rate of another. Central banks use the IRD to determine the cost of borrowing one currency against another, and to set their interest rates accordingly. For more information about interest rate differential, visit websites such as Investopedia, Bankrate, and the Federal Reserve Bank of St. Louis.
See Also
- Currency Exchange Rate
- Interest Rate Swap
- Currency Swap
- Currency Futures
- Currency Options
- Currency Arbitrage
- Currency Risk
- Currency Hedging
- Currency Carry Trade
- Currency Correlation
