Write short notes on LIBOR rate?


Ans.  LIBOR refers London Inter Bank Offered Rate and represents the rate at which banks in London will lend a currency to other banks for a given period of time. Since London is a major Eurocurrency market, LIBOR is used as the basis for most Eurocurrency transactions. Because of the very high turnover of funds in this market and the large number of participants, it is strongly competitive. Rates are floating and are determined simply by supply and demand of funds in the market.

LIBOR is the base rate in London market from which the banks fixes its own rate of interest to charge on their lending.  


Write short notes on the followings:

  Ans. a) LIBID: London Interbank Bid rate. It is the rate at which banks accept Euro currwency deposit. Bid rates are lower than offered rates usually by 1/8 to ¼ percent.


b) LIMEAN: It is the average of LIBOR & LIBID.


c) EURO LIBOR: While LIBOR is applicable for dollar transactions, EUROLIBOR is applicable for transactions in Euro. It is based on the rates quoted by 16 banks in London.  


d) EURIBOR: Euro Interbank Offered Rate (EURIBOR) is the benchmark rate of the large Euro money market that has emerged since 1999. Euribor is the rate at which Euro interbank term deposits are offered by one prime bank to another prime bank. It is based on 57 banks in Euro zone.


e) Prime Rate: This is the rate of interest charged by first class banks in the USA on advance to their first class borrowers. It may relate to an advance made to a multinational corporation with a high credit rating.


f) SIBOR: Singapore Interbank Offered Rate. Similar to LIBOR, it is the rate at which principal banks in Singapore offer to lend Asian dollars and other currencies to other banks. SIBOR forms the basis for interest rate on Asian dollar and syndicate loans.


g) Asian currency market: The Asian currency market is popularly known as the “Asian Dollar Market” and is situated in Singapore. It is an international money and capital market. This market commenced operation in 1958 and since than it has been developing very rapidly. The market provides profitable investment opportunities for persons holding relatively small amount of US dollar which because of their small size, could not find out investment outlet in the Euro dollar market.


h) Euro Dollar: Euro dollar are not special type of dollars but are US dollar deposits held with banks outside the United States are lent to borrowers in Europe and America. The Euro dollar can be used by their holders in the same way as any dollar deposits in the United States.


The only feature distinguish a Euro Dollar transaction from a transaction in dollar deposits with a bank in the USA that it takes place in a bank outside the USA.  


i). Petro Dollar: Petro dollar is the term used for describing the US Dollar holdings of oil producing countries out of their sale of oil and petroleum products to other countries. A large portion of the surplus fund found a way as deposits with American & European banks. Such deposits in dollars are referred to as oil or petro dollars.      

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