USD LIBOR interest rate - US Dollar LIBOR
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What Is LIBOR?
In late September the U. It has its roots in the sudden growth in the early s use of futures contracts to hedge against interest rate risk. Good benchmark rates were needed to settle those contracts. Markets turned to the banking industry trade group and the Bank of England to provide such a rate. LIBOR was established as a standardized benchmark for the pricing of floating-rate corporate loans. However, its introduction coincided with the growth of new interest rate—based financial instruments—such as forward rate agreements and interest rate swaps—that also require standardized and transparent interest rate benchmarks.
That is, it represents the cost of funds—although a bank may not actually have a need for the funds on any given day. But LIBOR has long been dogged by perceptions that the method for setting the rates is flawed and prone to distorted results during periods of market stress when banks stop lending to each other across the full maturity spectrum, from overnight to one year. Most banks loan each other money for a week or less, so most LIBORs for longer maturities are set on the basis of educated guesses.
Yet almost 95 percent of transactions that reference one of the LIBORs—from interest rate derivatives to home mortgages—are indexed to rates for maturities three months or longer. Nevertheless, LIBORs have been found to be reasonably accurate, most of the time tracking closely similar benchmarks that are tied to actual unsecured bank funding rates such as those for commercial paper. The glaring exception was the period immediately after the September failure of the New York investment banking firm Lehman Brothers, which triggered the global financial crisis.
LIBOR was lower than the Eurodollar rate during early but was markedly lower in the period immediately following the Lehman collapse. The final LIBOR figure is arrived at by discarding the upper and lower quartiles of the market quotes provided by the panel, then averaging the middle two quartiles.
This calculation is repeated for the ten currencies covered by LIBOR, which include US dollar, Japanese yen and euro and the figure is published at around When looking at the LIBOR rate it is important to remember that it is calculated using voluntary quotes provided by the banks, as opposed to actual trades. LIBOR is extremely sensitive to changes in the market and is affected by a number of different factors that make it very difficult to forecast.
Elements such as interest rate changes set by the central bank of a particular country, the amount of liquidity available in the markets and the current economic climate can all influence the LIBOR figure. As LIBOR is set for each currency by a different panel of banks, it is not affected by currency exchange rates.
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