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The London Interbank Offered Rate (LIBOR) came into widespread use in the 1970s as a reference interest rate for transactions in offshore Eurodollar markets. [25] [26] [27] 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.
A "five-year Euribor" will be in fact referring to the 5-year swap rate vs 6-month Euribor. "Euribor + x basis points", when talking about a bond, will mean that the bond's cash flows have to be discounted on the swaps' zero-coupon yield curve shifted by x basis points in order to equal the bond's actual market price.
The most common use of reference rates is that of short-term interest rates such as LIBOR in floating rate notes, loans, swaps, short-term interest rate futures contracts, etc. The rates are calculated by an independent organisation, such as the British Bankers Association (BBA) as the average of the rates quoted by a large panel of banks, to ...
The TED spread is an indicator of perceived credit risk in the general economy, [2] since T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. An increase in the TED spread is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk ) is increasing.
3-month LIBOR is generally a floating rate of financing, which fluctuates depending on how risky a lending bank feels about a borrowing bank. The OIS is a swap derived from the overnight rate, which is generally fixed by the local central bank. The OIS allows LIBOR-based banks to borrow at a fixed rate of interest over the same period.
[US$ 3x9 − 3.25/3.50%p.a ] – means deposit interest starting 3 months from now for 6 months is 3.25% and borrowing interest rate starting 3 months from now for 6 months is 3.50% (see also bid–ask spread). Entering a "payer FRA" means paying the fixed rate (3.50% p.a.) and receiving a floating 6-month rate, while entering a "receiver FRA ...
The LIBOR market model, also known as the BGM Model (Brace Gatarek Musiela Model, in reference to the names of some of the inventors) is a financial model of interest rates. [1]
A short-term interest rate (STIR) future is a futures contract that derives its value from the interest rate at maturation. Common short-term interest rate futures are Eurodollar, Euribor, Euroyen, Short Sterling and Euroswiss, which are calculated on LIBOR at settlement, with the exception of Euribor which is based on Euribor and Euroyen which is based on TIBOR.