INTERNATIONAL FINANCIAL MANAGEMENT

PRESENTATION TOPIC :
LIBOR ( LONDON INTER –BANK OFFERED RATE)

SUBMITTED TO : MS. NAMITA NARANG GAGNEJA

SUBMITTED BY : SANCHITA DHINGRA

M.COM SEMESTER IV
TUTORIAL GROUP “B”
DEPARTMENT OF COMMERCE,
DELHI SCHOOL OF ECONOMICS
 WHAT IS LIBOR ?

• The London Inter-bank Offered

Rate (or LIBOR) is a daily reference rate
 based on the interest rates at which 
banks borrow unsecured funds from other
banks in the London wholesale
money market (or 
inter-bank lending market).
• This can be seen from the point of view of
the banks making the 'offers', in terms of
the interest rate the banks will lend to
each other: that is 'offer' money in the
form of a loan for various time periods
(maturities) and in different currencies.
• There are ten currencies for which LIBOR
is computed:
• Australian Dollar (AUD)
• Canadian Dollar (CAD)
• Swiss Franc (CHF)
• Danish Krone (DKK)
• Euro (EUR)
• British Pound (GBP)
• Japanese Yen (JPY)
• New Zealand Dollar (NZD)
• Swedish Krona (SEK)
• U.S. Dollar (USD)
 The LIBOR is among the most common of
benchmark interest rate indexes used to make
adjustments to adjustable rate mortgages.,
business loans, and financial instruments traded
on global financial markets.

This rate is applicable to the short-term

international inter bank market, and applies to
very large loans borrowed for anywhere from one
day to five years.

This market allows banks with liquidity

requirements to borrow quickly from other banks
with surpluses, enabling banks to avoid holding
excessively large amounts of their asset base as
liquid assets.

The LIBOR is officially fixed once a day by a small

group of large London banks, but the rate
changes throughout the day.
 HISTORY OF LIBOR
• In 1984 it became apparent that an increasing number of banks were
trading actively in a variety of relatively new market instruments, notably 
interest rate swaps, foreign currency options and forward rate agreements.

• While recognizing that such instruments brought more business and greater
depth to the London Inter bank market, bankers worried that future growth
could be inhibited unless a measure of uniformity was introduced.

• In October 1984 the British Bankers' Association (BBA) —

working with other parties, such as the Bank of England --
established various working parties, which eventually culminated
in the production of the BBA standard for interest rate swaps,
or "BBAIRS" terms.

• Part of this standard included the fixing of BBA

interest-settlement rates, the predecessor of BBA LIBOR.
• From 2 September 1985, the BBAIRS terms became
standard market practice.

• Member banks are international in scope,

with more than sixty nations represented
among its 223 members and 37 associated
professional firms (as of 2008).
 WHO CALCULATES LIBOR?
AND HOW IS IT CALCULATED?
• LIBOR is calculated and published by Thomson Reuters on
behalf of the British Bankers' Association (BBA) after 11:00 am
(and generally around 11:45 am) each day (London time).

• It is a trimmed average of inter-bank deposit rates offered by

designated contributor banks, for maturities ranging from
overnight to one year.

• LIBOR is calculated for 10 currencies.

• There are either eight, twelve or sixteen contributor banks

on each currency panel and the reported interest is
the mean of the middle values (the inter-quartile mean).

• The rates are a benchmark rather than a tradable rate;

the actual rate at which banks will lend to one
another continues to vary throughout the day.
 SCOPE OF LIBOR
The LIBOR is widely used as a reference rate for
financial instruments such as
• forward rate agreements
• short-term-interest-rate futures contracts
• interest rate swaps
• inflation swaps
• floating rate notes
• syndicated loans
• variable rate mortgages
• currencies, especially the US dollar .

They thus provide the basis for some of the world's

most liquid and active interest-rate markets.
 TYPES OF LIBOR
When talking about the current LIBOR rates several rate
types exist, which are used as indexes for the Adjustable
Rate Mortgage.  Some of these LIBOR rate types include
the following:

•    One Month LIBOR Rate – Interest on the loan would

not change for a one-month period.  To determine the
amount of interest the borrower would pay,
a calculation would be completed when the original
loan interest rate and amount of margin would be added,
based on the LIBOR Index.  The value of this Index is
determined on a monthly basis, which in turn creates
fluctuations for the interest payment on a monthly basis.

•    Three Month LIBOR Rate – In this case, the interest

rate for the loan would remain the same for three
months.  However, if the borrower were to extend the
length of the loan, the value of that loan would be
modified.
• Six Month LIBOR Rate – Next, current LIBOR
rates for this would be set and remain unchanged
for a full six months.  Again, if the borrower of the
loan were to extend the length of the loan, the rate
would be adjusted.

•  One Year LIBOR RATE – Finally, the one-year

current LIBOR rates would be the rate that London
banks in the inter bank market would be allowed to
borrow from other banks within the one-year
period. 
For this, the rate established on any particular day
would apply on the day the loan was issued.  As far
as changes with the interest rate, they would
remain unchanged until the term of the loan ends.
LIBOR - USAGE
• LIBOR is often used as a rate of reference for 
Pound Sterling and other currencies, including 
US dollar, Euro, Japanese Yen, Swiss Franc, 
Canadian dollar, Australian Dollar, Swedish Krona, 
Danish Krone and New Zealand dollar.

• Six-month USD LIBOR is used as an index for some

US mortgages.

• In the UK, the three-month GBP LIBOR is used for

some mortgages—especially for those with adverse
credit history.

• LIBOR is used by the Swiss National Bank as their 

reference rate for monetary policy.

• The difference between the LIBOR rate and the

interest rate on treasury bills is a key marker of the
financial health of banks. 
 FACTORS AFFECTING LIBOR
• Financial markets are what set current LIBOR rates.

• In addition to this, the LIBOR rates are also affected by

the Federal Funds Rate.  This means that LIBOR
rates could change whenever the Federal Funds Rate
experiences change.

• Current LIBOR rates can also be affected

by a number of financial instruments. 
As an example, floating rate loans,
Variable Rate Mortgages, and Adjustable Rate
Mortgages all influence these rates.
• Currency movements - activities related to
foreign currencies, especially the US
dollar and the Euro, also play an important
role in determining the LIBOR rates on a
daily basis.
DERIVATIVES RELATED TO LIBOR
Eurodollar futures
• Traded at the Chicago Mercantile
Exchange (CME), Eurodollars are US
dollars deposited at banks outside the
United States, primarily in Europe.
• By holding the deposits outside the country,
US depositors are not subject to Federal
Reserve margin requirements, allowing
higher leverage of the funds.
• The interest rate paid on Eurodollars is
largely determined by LIBOR, and
Eurodollar futures provide a way of betting
on or hedging against future interest rate
changes.
• Interest rate swaps are another
significant financial derivative dependent
on LIBOR.
• In an interest rate swap, two parties
exchange sets of interest payments on a
given amount of capital. Generally, one
party will have a fixed interest payment,
while the other will have a variable rate.
• The variable rate payment stream is often
defined in terms of LIBOR. Interest rate
swaps, and by extension LIBOR, are
extremely important in providing a
liquid secondary market for residential
mortgages, which in turn allows lower
interest rates on US mortgages.
Why is Knowledge of Current LIBOR
Rates Important?
• Often financial institutions offering loans
based on the current LIBOR rate apply higher
interest rates. This is because most financial
institutions add their margins to the index
rates, typically including margins of one to two
percentage points.

• For example, if the current LIBOR rate is 3.5%

and a bank includes a margin of 2%, you will
have to bear a 5. 5% interest rate on the loan
you take from the bank. Thus, it is better to
know both the current LIBOR rates and the
margins charged by your banker.
• LIBOR Rates: Historical Charts
RELIABILITY OF LIBOR
• On May 29, 2008, the Wall Street Journal reported
that certain banks had been reporting lower rates to
the BBA than what WSJ analysis suggested they
should have been.

• Given the trillions of dollars tied to the LIBOR, even a

small inaccuracy in either direction can cost lenders,
borrowers, companies, or even whole economies
billions of dollars.

• The WSJ study estimated that, if true, the artificially

low U.S. dollar LIBOR saved U.S. borrowers about
$45 billion over the first four months of 2008.

•  The banks, however, denied this claim and stuck by

the rates they'd reported to the BBA and Reuters.