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Choosing a Maturity-Matched Rate for AUDUSD Differentials

Article Quant Q&A · Author: curious
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Summary

The document considers which interest-rate maturities are appropriate when calculating the rate differential for AUDUSD, using a one-month currency futures contract as its example. It distinguishes the question of which maturity to select from the practical problem that comparable government-bond yields may not be available for both currencies. The response recommends using one-month interbank rates, citing consistency with interest-rate swaps and naming the then-relevant US LIBOR rate as an example.

The advice is a short answer rather than a full pricing treatment. It does not discuss how futures settlement, forward points, collateral, or current benchmark conventions affect rate selection, and its named US benchmark may not be current. The useful principle is to match the rates’ tenor to the contract horizon and use comparable funding-market rates across currencies. The document does not provide an alternative procedure for cases where a matching rate is unavailable for one side.

Key ideas

  • The example concerns selecting rates for a one-month AUDUSD futures horizon.
  • The response recommends one-month interbank rates to align the comparison with swap conventions.
  • Rate tenor should correspond to the maturity being analyzed.
  • The answer does not address unavailable benchmark rates or broader currency-pricing conventions.

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Full text
# Which interest rates (maturity length) should one use for calculating interest rate differential of AUDUSD?


# Which interest rates (maturity length) should one use for calculating interest rate differential of AUDUSD?












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.

https://www.thebalance.com/what-is-an-interest-rate-differential-1344962

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?

## Answer by Charles Fox (score 1)

https://quant.stackexchange.com/a/41756

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

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.