LIBOR

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Stands for the London Inter-Bank Offered Rate. It is used as a reference rate by banks to borrow from other banks. It is the most widely accepted interest rates for forwards, futures and interest rate swap contracts.

The British Bankers Association is the institution that sets LIBOR. It is calculated by getting the average offered rate of 16 multinational banks at exactly 11 A.M GMT. This allows banks to secure funds at a cheaper cost, because they are borrowing at the interbank rate.

The BBA calculates the LIBOR rates for all the different currencies at the same time. Some examples are the euro Libor (otherwise known as the Euribor), Japanese yen LIBOR and U.S. dollar LIBOR. The U.S. dollar LIBOR is the rate that is most newspapers and financial institutions are referring to when they talk about LIBOR.

Take note that other domestic financial centers construct their own interbank offered rates for domestic loans and financial instruments. Some examples are SIBOR (Singapore Interbank Offered Rate) and PIBOR (Paris Interbank Offered Rate).

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