LIBOR London Interbank Offered Rate

1. LONDON INTERBANK
OFFERED RATE
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2. What is LIBOR?
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¨ LIBOR stands for London interbank offered
rate. Banks in London, similar to the United
States, can exchange money between banks.
LIBOR is the rate at which banks borrow funds
from other banks in the London interbank
market.
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3. LIBOR Calculation
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¨ LIBOR is an average of actual rates used by banks. To
calculate LIBOR, the British Banker’s Association (BBA),
surveys a variety of banks that reflect the general market.
The BBA then surveys the different banks’ interbank interest
rate quotes. These quotes are made available to the public.
¨ The top and bottom quartile of the quotes are discarded, and
the remaining interest rate quotes are averaged to form the
daily LIBOR. LIBOR is calculated daily at 11:00 am London
time or 6:00 am eastern time. Because LIBOR is an average
of quotes and only calculated daily, the actual rates used
between banks may fluctuate from the specific LIBOR rate.
However, LIBOR provides a good approximation of the actual
rates being used. This approximation is normally more
accurate for short-term LIBOR rates and less accurate for
long-term LIBOR rates.
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4. LIBOR RATES
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¨ LIBOR rates are provided for periods of up to
12 months. The most common rates are the
daily, weekly, one month, six month, and one
year. LIBOR rates are also provided in ten
currencies, including the US dollar, Japanese
yen, Euro, and Pound Sterling. The Financial
Times displays current LIBOR rates in multiple
currencies.
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5. LIBOR Applications
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¨ LIBOR is an important rate that influences
many financial instruments. In addition to
providing an interbank lending rate and
baseline for other lending rates, LIBOR also
influences derivatives. Eurodollar futures and
interest rate swaps are derivatives that are
influenced significantly by LIBOR.
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6. Reference
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¨ Sharpe Investing
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