In the past few days we have heard a lot about LIBOR and the activities associated with it.

So $treet thought to apprise NITIE of all the insights about LIBOR and the related activities that have been in the limelight off late.

LIBOR
Full Form : London Interbank Offered Rate What is it : As the name suggests it is a bank to bank offer rate. It is the average interest rate that is estimated by leading banks in London. This rate is usually charged while banks borrow from each other. Who calculates it : It is calculated by Thomson Reuters for the British Banker's Association(BBA) Number of Currencies and Borrowing Periods : It is being calculated for 10 currencies and 15 borrowing periods that range from overnight to an year Time of Publishing : It is published daily at 11:30 AM (as per London Local Time) Total Number of Banks participating in LIBOR : At least 8.

Question : Given below are few of the interest rates stated by a panel of 18 banks. Calculate the LIBOR rate for the same ??? 0.17, 0.12 , 0.11, 0.13, 0.14, 0.15 , 0.18, 0.16, 0.20, 0.22 , 0.19, 0.21, 0.10, 0.09, 0.11, 0.26 , 0.27, 0.28 Well, you guys must be wondering how to calculate the LIBOR rate when we have not specified how to do so. The next subheading would be specifically to describe how LIBOR is calculated.

Calculation of LIBOR :
Each day , the BBA surveys the panel of banks and asks at what rate could they have borrowed funds , were they to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 AM. In simpler terms , each bank needs to specify an interest rate (interbank ) in which they would be able to raise a substantial loan in the interbank money market at that moment. In London , the number of banks in the panel surveyed by BBA is 18. The highest 25% and the lowest 25% values are discarded and the average of the rest of the values are taken. This is reported at 11:30 AM.

So the answer for the above question would be : Discarding the top 4 values : Discarding the bottom 4 values : 0.28,0.27,0.26,0.22 0.09,0.10,0.11,0.11

Averaging the rest we get : (0.17+0.12+0.13+0.14+0.15+0.18+0.16+0.20+0.19+0.21)/10 = 0.175

One thing that might be going through your minds at this moment would be why at all is LIBOR being calculated?? What is the use of the LIBOR ?? Well, hopefully the next few set of sentences would answer this.

Significance of LIBOR :
Most important benchmark in the world for short term interest rates. Base rate for large number of financial products like futures, options and swaps. Banks use it as base rate while setting the interest rates for loans, savings and mortgages.

So enough of gyaan on 'LIBOR'. We chose to write on this topic not only to explain what LIBOR is but also about the LIBOR scandal in which a group of banks were involved.

LIBOR Scandal:

Story So Far :
A host of banks including Barclays , HSBC, Royal Bank of Scotland were questioned in US for alleged manipulation of LIBOR. Some discrepancies were found in the rates stated by some banks. "The Wall Street Journal" released a controversial study that some banks have understated borrowing costs that may have misled others about the financial position of these banks. It was between 2005 and 2012 when all these manipulation was done. Barclays admitted to the manipulation of LIBOR rate and was fined by numerous judiciary bodies all over the world. To quote the figures it was fined $200 million by the Commodity Futures Trading Commission, $160 million by the United States Department of Justice and 59.5 million by the Financial Services Authority. After this scandal, Bob Diamond, the CEO of Barclays also resigned from his position. One question that came in our mind when we studied the LIBOR scandal was "Why would any bank do it??" Well , there are many reasons why banks would like to do it. It is very difficult to quote the exact reason why the banks did that in the recent LIBOR scandal but we can always speculate the probable reasons behind that : Banks can do it to boost their profits. Evidence of this includes emails between traders and rate submitters at the bank, with traders urging the latter to change the rate. In one request for a change to Libor, a trader said: "Please feel free to say no. Coffees will be coming your way either way, just to say thank you for your help in the past few weeks." The rate submitter replied: "Done for you big boy." Banks can do it to portray a wrong financial image in front of investors. As already stated, LIBOR is the interest rate (or the cost) that a bank incurs while borrowing money from other banks. Now when a bank quotes a low value it tries to show that it is considered a safe

haven for investing money because banks with higher risks are charged more. This low value throws a false image in front of investors which should be avoided.

There could be other various reasons for manipulating LIBOR but we tried to point out some of the major ones that could have been associated with the recent LIBOR scandal.

Why should we bother so much about LIBOR manipulation??? LIBOR has a huge impact on derivatives market. It underpins approximately $350 trillion in derivatives market.It is used as a reference rate for mortgages, student loans, financial derivatives and other financial products. Some mortgages are directly linked to Libor and the rates will move up and down with it. This is especially true of buy-to-let mortgages (a mortgage arrangement in which an investor borrows money to purchase property in the private rented sector in order to let it out to tenants). However, even if your mortgage is not directly linked, your lender will have been using Libor to decide whether to make loans, mortgages or credit card deals more expensive or cheaper. For example, when Halifax raised its default standard variable mortgage rate, affecting 800,000 customers, it cited a high Libor rate to explain its actions.

With this we come to an end of this short description about what LIBOR is and what actually was the LIBOR scandal. A poster definitely is not enough for us to describe everything about LIBOR but we tried pointing out all the major points related to LIBOR. Team $treet would continue this endeavour of posting articles through these posters. Till then MAKE MONEY