Interest Rate Differential (IRD)

The interest rate differential (IRD) is the difference between two interest rates, typically between two different currencies. It is a measure of the cost of borrowing in one currency versus another.

The IRD is calculated as follows:

IRD = (Interest rate in currency A) - (Interest rate in currency B)

For example, if the interest rate in the United States is 2% and the interest rate in the United Kingdom is 4%, the IRD would be 2%.

The IRD can be used to make a number of financial decisions, such as:

• Hedging against currency risk.
• Calculating the cost of cross-border transactions.
• Evaluating the profitability of foreign investments.

The IRD is also used by banks and other financial institutions to set interest rates on loans and other financial products.

In general, the IRD is a positive number when the interest rate in currency A is higher than the interest rate in currency B. This is because it is more expensive to borrow in currency A than in currency B.

However, the IRD can also be negative when the interest rate in currency A is lower than the interest rate in currency B. This is because it is cheaper to borrow in currency A than in currency B.

The IRD is an important concept in international finance. It can be used to make a number of financial decisions and to understand the cost of borrowing in different currencies.