Interest Differential

Interest Differential
In an overseas exchange market, the differential of the interest rate means the difference in the rate of interest between to same interest bearing money. In spot overseas exchange market, it pertains to be the dissimilarity in the rate of interest. For instance, if an Australian dollar has the rate of interest of 4.5% and Yen of Japan has a rate of interest of nearly 0.0%, then the differential rate between any two is about 4.40%. It is a significant factor to consider while engaging in the carry trade.