Explain the Calculation of Libor


During the evolution of this market, London has developed as the major centre for such
financial operations. LIBOR (London Interbank Offered Rate) is the fundamental
benchmark to gauge the cost of unsecured borrowing in the global Interbank Market. It
represents the average rate at which a bank can obtain unsecured funding in a given
currency for a given period. A panel of 8 to 16 Euro-banks in the London market have
been designated by the British Bankers’ Association (BBA) based on scale of market
activity, credit rating and perceived expertise in the currency to contribute the rates at
which they would be willing to transact funds in the Interbank Market. These banks quote
lending rates for all the ten acceptable currencies and fifteen standard maturities from one
day (overnight) to one year (12 months). Bid rates are not considered. The contributions of
the designated banks are received by the BBA at 11 a.m London time on every trading
day. The quotations are listed in descending order. The top and bottom quartiles (i.e. 25%
quotations) are excluded and the average of the remaining quotations represents the
LIBOR ‘FIXING’ for that day. By eliminating the extreme quotations, an individual
contributor cannot influence the LIBOR calculation.

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