Interest Rate Differential (IRD)
The difference between the interest rates of two similar assets and will vary based on the cross being traded; in forex the IRD may positively or negatively affect your account balance if positions are held overnight/for a long time. In the NOK/JPY trade you will get 7% (annual) interest and will pay 0% for borrowing the JPY. This is a positive IRD. Usually this will not matter for most traders.
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.
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