Hey, can anybody tell me the meaning of the term " International interest rate differential" ? ?

Question

I have googled this term in Google for hours and NOT ONCE did i get a comprehensive explanation of the term.

Answer 1

http://www.investopedia.com/terms/i/inte...

A differential measuring the gap in interest rates between two similar interest-bearing assets. Traders in the foreign exchange market use interest rate differentials (IRD) when pricing forward exchange rates. Based on the interest rate parity, a trader can create an expectation of the future exchange rate between two currencies and set the premium (or discount) on the current market exchange rate futures contracts.  



The IRD is a key component of the carry trade. For example, say an investor borrows US$1,000 and converts the funds into British pounds, allowing the investor to purchase a British bond. If the purchased bond yields 7% while the equivalent U.S. bond yields 3%, then the IRD equals 4% (7-3%). The IRD is the amount the investor can expect to profit using a carry trade. This profit is ensured only if the exchange rate between dollars and pounds remains constant.

http://glossary.reuters.com/index.php/In...

The difference in yield between two comparable instruments denominated in different currencies. Used in forward foreign exchange pricing.

http://www.anz.com/edna/dictionary.asp?a...

The difference between the interest rates paid on debt instruments, eg, the interest-rate differential (spread) between $US bonds yielding 9 per cent and Swiss franc bonds yielding 4 per cent is 5 percentage points.