In your own word explain about LIBOR rate. Your report should discuss what is LI
ID: 2813693 • Letter: I
Question
In your own word explain about LIBOR rate. Your report should discuss
what is LIBOR, when was it introduced to the financial market, why it is important in financial
market, how they calculate LIBOR, who oversee calculation of LIBOR, frequency of LIBOR rate
calculation, usage of LIBOR rate, what is “LIBOR scandal”, aftermath of “LIBOR scandal”, new
rules placed on LIBOR calculation after the scandal, when is LIBOR going to phase out,
alternatives to LIBOR, new USA alternative to LIBOR named as SOFR, progress of SOFR rate
calculation, How SOFR is calculated, is SOFR better alternative to LIBOR also discuss new
European alternatives to LIBOR.
Minimum number of pages: 6
Maximum number of pages: 10
Font Size: 12
Font Type: Times New Roman
Border: 1 inch (left, right, top, bottom)
Line space: 1.5
You must cite any reference you use. It is plagiarized work, if you do not cite your sources.
Explanation / Answer
LIBOR is the average interbank interest rate at which a selection of banks on the London money market are prepared to lend to one another. LIBOR comes in 7 maturities (from overnight to 12 months) and in 5 different currencies. The official LIBOR interest rates are announced once per working day at around 11:45 a.m. In the past, the BBA/ICE published LIBOR rates for 5 more currencies (Swedish krona, Danish krone, Canadian dollar, Australian dollar and New Zealand dollar) and 8 more maturities (2 weeks, 4, 5, 7, 8, 9, 10 and 11 months). LIBOR rates were first used in financial markets in 1986 after test runs were conducted in the previous two years. The LIBOR rate it is one of the most globally significant numbers in finance. Banks, financial institutions, and credit agencies all over the world look to LIBOR to set their own interest rates.
One of the main reasons LIBOR is used so widely is because of the way the rate is calculated and constructed. LIBOR represents the lowest borrowing rate among banks and big financial institutions. Other rates are fixed on top of the LIBOR. This is often expressed as “LIBOR + X bps” where, bps stands for basis point and X is the premium charged over and above the LIBOR rate by the lender to the borrower. Thus any increase or decrease in the base rate (which is the LIBOR rate) impacts contracts tied to LIBOR or based on it as a benchmark.
LIBOR is commonly used as the floating rate for interest rate swaps, future contracts, mortgages, student loans, and even corporate funding. LIBOR is also used for setting the settlement prices for interest rate future contracts that help companies to hedge interest rate exposure. LIBOR provides a fair idea to central banks and other important institutions about the expectations on interest rates and linked developments.