LIBOR stands for London interbank offered rate. Banks in London, similar to the United States, can exchange money between banks. LIBOR is the rate at which banks borrow funds from other banks in the London interbank market.

LIBOR Calculation
LIBOR is an average of actual rates used by banks. To calculate LIBOR, the British Banker’s Association (BBA), surveys a variety of banks that reflect the general market. The BBA then surveys the different bank’s interbank interest rate quotes. These quotes are made available to the public.

The top and bottom quartile of the quotes are discarded, and the remaining interest rate quotes are averaged to form the daily LIBOR. LIBOR is calculated daily at 11:00 am London time or 6:00 am eastern time. Because LIBOR is an average of quotes and only calculated daily, the actual rates used between banks may fluctuate from the specific LIBOR rate. However, LIBOR provides a good approximation of the actual rates being used. This approximation is normally more accurate for short-term LIBOR rates and less accurate for long-term LIBOR rates.

LIBOR Rates
LIBOR rates are provided for periods of up to 12 months. The most common rates are the daily, weekly, 1 month, 6 month, and 1 year. LIBOR rates are also provided in ten currencies, including the US dollar, Japanese yen, Euro, and Pound Sterling. The Financial Times displays current LIBOR rates in multiple currencies.

LIBOR Applications
LIBOR is an important rate that influences many financial instruments. In addition to providing an interbank lending rate and baseline for other lending rates, LIBOR also influences derivatives. Eurodollar futures and interest rate swaps are derivatives that are influenced significantly by LIBOR.

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