London Interbank Offered Rate

London Interbank Offered Rate (or LIBOR) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale (or "interbank") money market.

Scope

LIBOR rates are widely used as a reference rate for financial instruments such as:-

forward rate agreements
short term interest rate futures contracts
interest rate swaps
floating rate notes
syndicated loans
currencies, especially the US dollar (see also Eurodollar).

They thus provide the basis for some of the world's most liquid and active interest rate markets.

For the Euro, however, the usual reference rates are the Euribor rates compiled by the European Banking Federation, from a larger bank panel. A Euro LIBOR does exist, but mainly for continuity purposes in swap contracts dating back to pre-EMU times.

Technical features

LIBOR is published by the British Bankers Association (BBA) shortly after 11:00 each day, London time, and is a filtered average of inter-bank deposit rates offered by designated contributor banks, for maturities ranging from overnight to one year. The shorter rates, i.e. up to 6 months, are usually quite reliable and tend to precisely reflect market conditions at measurement time. The actual rate at which banks will lend to one another will, however, continue to vary throughout the day.

Apart from the US dollar and, of course Pound Sterling, currencies for which LIBOR is a significant reference rate currently include the Swiss Franc, the Yen, the Canadian dollar and the Danish Krone.

In the 1990s, Yen LIBOR rates were altered by credit problems affecting some, but not all, of the contributor banks. For a precise definition of BBA LIBOR, see the BBA website.

LIBOR-based derivatives

Eurodollar contracts

The Chicago Mercantile Exchange's so-called Eurodollar contracts are based on three-month US dollar LIBOR rates. They are the world's most heavily traded short term interest rate futures contracts and extend up to 10 years. For the shorter maturities, fungible contracts trade on London's Euronext.liffe in European time and the Singapore Exchange in Asian time.

Interest Rate Swaps

Interest rate swaps based on short LIBOR rates currently trade on the interbank market for maturities up to 50 years. A "five year LIBOR" rate refers to the 5 year swap rate vs 3 or 6 month LIBOR. "LIBOR + x basis points", when talking about a bond, will mean that the bond's cash flows have to be discounted on the swaps' zero-coupon yield curve shifted by x basis points in order to equal the bond's actual market price.

External links

Interest rates