What is LIBOR
The most popular and remarkable interest rate dealing market that remains active is LIBOR. It stands for London Interbank Offered Rate. The calculation of LIBOR is accounted based on the short-term deposits offered by different banks participating in London Money Market. Plenty of derivatives in money that are accounted with the help of LIBOR such as Eurodollars, interest rate of future and swaps help economy in many ways. London is under the account of financial centre for Global economy so application of LIBOR is not limited to Pound Sterling rather it extends up to Swiss Franc, Canadian Dollar, US Dollar and Japanese Yen. As per London, time the calculation of LIBOR accounts every day sharp in the morning around 11:00 AM. The calculation period for LIBOR varies starting from duration of overnight to account of entire year.
This is quite different from rates offered by bank towards each other community. The value of LIBOR declared early in the morning remains constant throughout the day. The introduction of LIBOR came in to the year 1984, as there were plenty of banks busy in trading with new and inventory money markets by dealing with activities like foreign currency, rate agreements and interest rate. All these instrumental activities forced banks of London to think a lot and because of this they had plan to draw in a scheme or pattern called LIBOR in order to secure the future of London market.
The main task of LIBOR is to accompany financial transactions in form of reference rate. There are various applications in support of this activity like Forward Rate Agreements, future contracts, inflation swaps, syndicated loans, floating rate, interest rate, variable rate and currencies. Swiss Bank uses the concept of LIBOR as reference rate in order to account monetary policy. The popular and important terms or finances connected with LIBOR are derivatives of Eurodollar future. Another significant derivative attached with LIBOR principle is swaps related to interest rate.
These swaps are accounted on interchanging of interest payments by two parties regarding exchange sets based on allotted capital. When accounting these activities between two parties one will practice fixed rate while the other one the variable rate. LIBOR is used to deal with variable interest rate. Residential mortgages are supported by secondary type liquid market by mainly two factors either by rate swaps or by extension LIBOR. All this process allows or supports low rates of interests regarding US mortgages. The transaction for the account of LIBOR is welcomed in Euros and its introduction has resulted in generation of Euribor. This parameter is parallel to LIBOR and managed by European Banking federation.