How LIBOR Sets Interest Rates

Posted By on August 8, 2013

Did you ever wonder just what LIBOR stands for…….well now you know!

Until July 2012, the London Interbank Offered Rate (LIBOR) was the biggest little number that nobody outside finance understood, and yet it touched the lives of virtually everybody.

LIBOR is an interest rate that gets calculated for ten currencies and fifteen borrowing periods that range from overnight to one year. It is published every day in London after submissions from a group of major banks. Currently, eighteen banks contribute to the fixing of US dollar Libor, for example. The LIBOR rate is calculated by taking estimates from each of the banks, throwing out the highest and lowest four indications and averaging the remaining ten.

The resulting number itself is measured in mere basis points (hundredths of one percentage point), but it underpins a staggering $350 TRILLION in derivatives and is a vital component in setting the price on hundreds of thousands of OTC transactions around the globe every day. The wonder of leverage at work….

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