LIBOR

RELEVANCE – UPSC GS PRELIMS

PRACTICE QUESTIONS

First go through the text (given after the questions) and then attempt the questions.

QUES 1 . LIBOR is-

1 . Global reference rate for unsecured short-term borrowing in the interbank market.

2 .Rate that some of the world’s leading banks charge each other for short-term loans.

3 . An indicator of the health of the financial system.

Select the correct code:

a . 1 & 2

b . 1 & 3

c . 2 & 3

d . 1 , 2 & 3

Answer – d

QUES 2 . Consider the following statements about LIBOR-

1 .It is based on three currencies.

2 . It serves only one maturity and that is of only one week.

Which among the above statements is/are correct?

a . 1 only

b . 2 only

c . Both 1 and 2

d . Neither 1 nor 2

Answer – d

ABOUT LIBOR

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LIBOR, the acronym for London Interbank Offer Rate, is the global reference rate for unsecured short-term borrowing in the interbank market. It acts as a benchmark for short-term interest rates.

In other words,it is a benchmark rate that some of the world’s leading banks charge each other for short-term loans.

It is used for pricing of interest rate swaps, currency rate swaps as well as mortgages. It is an indicator of the health of the financial system and provides an idea of the trajectory of impending policy rates of central banks.

Intercontinental Exchange Benchmark Administration

LIBOR is administered by the Intercontinental Exchange Benchmark Administration ,IBA and is based on five currencies: the U.S. dollar (USD), euro (EUR), pound sterling (GBP), Japanese yen (JPY), and Swiss franc (CHF). IBA consists of 11 to 18 banks that contribute for each currency.

Maturities

The LIBOR serves seven different maturities: overnight, one week, and 1, 2, 3, 6 and 12 months.

LIBOR Rates

There are a total of 35 different LIBOR rates each business day. The most commonly quoted rate is the three-month U.S. dollar rate (usually referred to as the “current LIBOR rate”).

How LIBOR is computed?

The rates received from the banks are arranged in descending order and the top and bottom quartiles are excluded to remove outliers. The arithmetic mean of the remaining data is then computed to get the LIBOR rate.