The interest rate differential is the difference between the interest rate of the national currency and the foreign currency, which can determine the movement of the currency.

Different foreign currencies have different deposit rates, so how do you convert a currency with a low interest rate into a currency with a high interest rate to earn that spread?

Assume that the one-year GBP deposit rate is 5.5% and the USD deposit rate is 5% for the same period, with a spread of 0.5% between them. Assuming that the current exchange rate between them is 1GBP=1.5USD, the sum of principal and interest of a 1-year deposit of 1500USD is 1575USD [1500USD x (1+5%)], which is converted into GBP of 1050GBP (1575USD÷1.5USD) if exchange rate fluctuations are not taken into account. But if you convert the 1500USD into 1000GBP first, the sum of principal and interest of the previous year's deposit will be 1055GBP [1000GBP x (1+5.5%)]. In short, the same amount of deposit, deposit GBP than deposit USD more than 0.5% interest rate difference. But this is only possible if the exchange rate is constant.

In other words, if by the end of the one-year deposit period, the exchange rate fluctuation between them is 1GBP = 1.48USD, the sum of the principal and interest of 1055GBP deposited with GBP is converted into USD of 1561.4 USD (1055GBP x 1.48USD), which is instead 13.6USD less than the USD deposit (1575USD - 1561.4USD) This is due to the 1.33% exchange difference between GBP and USD over the year [(1.50USD-1.48USD)÷1.50USD]. So when this exchange difference is greater than the spread, the arbitrage trade is more than worth the loss.