An interest rate differential is a difference in interest rate between two currencies in a pair.

It is not clear from the internet articles such as the one below which maturity length should be used for the interest rates in calculating the differential.


Let us use AUDUSD as an example. A person buys an AUDUSD currency futures contract that will expire in 1 month. Should we use 10-year, 1-year, 1-month government bond of the respective country to compute interest rate differential? Suppose we use 1-month government bond. What if 1-month government bond is available for U.S but not available for Australia?

  • 1
    $\begingroup$ How about the overnight rate? $\endgroup$ – Jared Marks Sep 12 '18 at 22:19
  • 2
    $\begingroup$ For a one month future or forward it should be the 1 month risk free rate in both countries. How that is actually implemented may differ from one country to another. The question is: if a bank wants to place a large sum for 1 month at low risk what kind of rate can they get. $\endgroup$ – Alex C Sep 14 '18 at 2:07

I would use the one month interbanking rates (Libor for US). This is to be consistent with interest rate swaps.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.