Grayson, who made over 100 appearances for the Seasiders and managed the club from 2005-2008, took over at Deepdale in February.
And the 43-year-old admits it is only since he accepted the role that he has come to understand how important the fixture is to both sets of fans.
"The rivalry is as fierce as any up and down the country," said Grayson.
"I didn't realise that until I came to Deepdale and got absolutely battered by all the fans and saw how much it meant to the Blackpool fans as well.
"We need to be composed on the ball and play the game not the occasion, but we also need that intense rivalry inside our bellies which fires us up for another game of football.
"There is going to be no love lost on the pitch, off the pitch, plenty of stick flying around and it will have all the ingredients of being a great cup tie."
Grayson has a strong squad available for the game, live on Sky, with Stuart Beavon (knee) the only player unavailable and the likes of Will Hayhurst and Iain Hume in contention to start.
Blackpool defeated Doncaster 3-1 in their Sky Bet Championship opener on Saturday.