LIBOR stands for the London Interbank Offered Rate, and it is the most robust interest rate market on earth. The LIBOR is based on the rates that the banks who are part of the London money market offer to each other when it comes to short term deposits. LIBOR is a big help in finding out the price of the numerous financial derivatives, which includes interest rate futures, swaps and Eurodollars. Because London is one of the most important hubs in global finance, the LIBOR is used and applied not just to the Pound Sterling but also to other currencies in the world, most notably, the US dollar, Swiss Franc, Japanese Yen and Canadian Dollar.
LIBOR is released at 11:00 am London time every day. A whole department that is part of the British Bankers Association is tasked with averaging the different inter-bank interest rates that are being offered by the member banks. LIBOR is calculated for different periods. It could be as short as an overnight rate or as long as a rate for one whole year. Even though the member banks’ inter-bank rate can change several times during the course of the day, LIBOR remains constant for a full 24 hour period. Actually, the difference between the LIBOR and the fluctuating inter-bank rates are quite small, especially if the short duration rates are compared.
The financial derivate that is really associated well with LIBOR are the Eurodollar futures. Eurodollars are traded at the Chicago Mercantile Exchange. Eurodollars are basically US dollars that are deposited in banks outside the US.