A Basic Understanding Of Finance Essays

757 Words Nov 22nd, 2016 4 Pages
Gaining a basic understanding of finance can be difficult given the number of complex details and caveats that make up the markets. For this reason, some of the most important concepts often go overlooked or misunderstood, one of those being Libor (London inter-bank offered rate). The rate is widely considered the primary benchmark in finance upon which trillions of dollars of contracts are exchanged.

Libor is a money market interest rate which banks and financial institutions use as a yardstick for borrowing from one another. It is determined each morning from a survey of 11 to 17 leading banks which asks them to estimate a rate they would be willing to pay to borrow money on a short term basis from another institution. Rates are produced across five currencies (USD, EUR, GPD, JPY, CHF) and seven different maturity dates, ranging from 1 month to a year. In total 35 rates are calculated, the most important being the three-month dollar Libor. The top and bottom quartiles for each Libor rate are excluded from calculation and the rest are arithmetically averaged to create a final rate.

Oversight of the process was recently passed from the British Bankers Association to the Intercontinental Exchange after allegations of rate manipulation came to light.

Seeing as rates are determined by banks, Libor is commonly referenced as a measure of confidence within the financial sector and Federal Reserve policy expectations. Consumers are familiar with the term because it is used to…

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