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Libor

Manoj Mehta (Head Of Department (Accounts & Finance)) (1479 Points)

13 March 2014

Dear friends my practical knowledge of SFM is not good and i want to know about LIBOR(London inter bank order rate). Just advice me how and where i can see this workings practically. Also put some light on use and benefits of using LIBOR. Regards and thanks in advance. ( please do not paste copy from internet site as i have already read it but tell me the practical effects of the same)

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4 Replies

Kartik Shetty (Industrial Trainee) (104 Points)
Replied 15 March 2014

It stands for london inter bank offered rate. It is a base rate based on which other rates are decided eg.rates at which banks lend to each other, loans provided, valuation of bonds etc. It changes depending on many macro-economic factors like risk perception, inflation, liquidity etc.

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Manoj Mehta (Head Of Department (Accounts & Finance)) (1479 Points)
Replied 15 March 2014

Dear Kartik

Can you tell me where i can find the working in practical business. In indusrty i have seen hedgeing techniques but not the use of LIBOR. Please put some light on the same.

Thanks for replying

Back in the Game (a) (1273 Points)
Replied 15 March 2014

Hello,

LIBOR is London interbank offer rate.A very Prima Facie perspective i derive It is a Rate offered on loans to banks by Banks of Foreign countries/UK/US.Incase an Exporter in India needs a Foreign Currency loan from SBI,SBI will Approach the Lending authority in Foreign currency-Which shall be in LIBOR rate to which the Retail banker ie SBI will add Premium of LIBOR+2% and issue it to Exporter?

Kartik Shetty (Industrial Trainee) (104 Points)
Replied 17 March 2014

As Libor is subject to change it is used as a base in many hedging tools like interest rate swaps, fra etc. Say a bank feels that Libor will fall, thereby int earned by him will fall, so he will enter into forward rate agreement, say @ 5% and the Libor is only at 4%. So the bank will be compensated for 1% by the other party.This 1% int amt. will then be discounted by the libor rate to bring it into present value. In short, libor is used as a base to hedge your position.Every month there is an anticipation that Rbi will increase or decreade the int rates, and we can see how indian markets get affected by it. Similarly Libor is important in us, uk and international markets.