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Assignment on LONDON INTERBANK MARKET AND ITS OFFERED RATE Semester- Spring 2012 F403: Financial Markets and

Institutions MBA Program

Prepared for: Syeda Mahrufa Bashar Lecturer Institute of Business Administration

Prepared by: Md. Raihan Shourov Roll-139 Batch-MBA 46D

November 28, 2012


LONDON INTERBANK MARKET The wholesale money market in London for the offering of deposits between commercial banks in a range of currencies usually for periods not exceeding 12 months. The interbank market refers to the market where banks make loans to each other. A bank in need of additional funds to meet its liquidity requirements for example will take out a loan from another bank in the interbank market. On the flip side, a bank with excess funds can participate in the interbank market to extract more value out of its liquid assets. A bank can also use the interbank market to quickly raise the capital it needs to fund a venture. Various interest rates are used in the interbank market, including the widely used London Interbank Offered Rate (i.e. LIBOR). Other rates used in interbank market transactions are the Euro Interbank Offered Rate (i.e. EURIBOR) and the Tokyo Interbank Offered Rate (i.e. TIBOR).

LONDON INTERBANK OFFERED RATE An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market.

The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is the world's most widely used benchmark for short-term interest rates. LIBOR is set by a panel of 6-18 international member banks and, by some estimates, places rates on a staggering $360 trillion of financial products across the globe

Calculation: Libor is calculated and published by Thomson Reuters on behalf of the British Bankers' Association (BBA). It is an index that measures the cost of funds to large global banks operating in London financial markets or with London-based counterparties. Each day, the BBA surveys a panel of banks (18 major global banks for the USD Libor), asking the question, At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in

a reasonable market size just prior to 11 am? The BBA throws out the highest 4 and lowest 4 responses, and averages the remaining middle 10. The average is reported at 11:30 a.m. There are separate LIBOR rates reported for 15 different maturities (length of time to repay a debt) for each of 10 currencies. The shortest maturity is overnight, the longest is one year.

Currency Australian (AUD) Canadian (CAD) dollar dollar British pound sterling (GBP) Japanese yen (JPY) New Zealand (NZD) dollar

Maturity 1 day 1 week 2 weeks 1 month, 2 months-12 months

Swiss franc (CHF) Danish krone (DKK) Euro (EUR)

Swedish krona (SEK) U.S. dollar (USD)