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Interest Rate Differential [IRD]

In the foreign exchange market, the interest rate differential (IRD) refers to the difference in interest rates between two similar interest-bearing currencies. In the spot foreign exchange market, this pertains to the difference in interest rates in a pair.

For example, if the Australian dollar has an interest rate of 4.50% and the Japanese yen has an interest rate of 0.10%, then the interest rate differential between the two is 4.40%.

The IRD is one of the most important factors to consider when engaging in carry trade.

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