LIBOR Defined

inspector_monkfish

Let me explain an example of how fragile the market still can be,
and how way out of court LIBORs currently are, especially USD.


i work for a Japanese Bank that receives huge amounts of JPY cash deposits, usually below libor
and when market is thin (few offers around) we can fund stuff via arbitrage (swapping our cheap JPY into another currency of our choice - usually USD)


21st May, normal day

3mth usd libor: 0.49688
a few USD offers around in 3mths
Arbitrage level where we can sell our cheap jpy to get 3mth usd: 0.82

24th May, markets shaky after few bits of bad news over w/e (spanish banks)
3mth usd libor: 0.50969
not so many USD offers around in 3mths
Arbitrage level where we can sell our cheap jpy to get 3mth usd: 0.94

25th May, markets totally spooked by Korea situation, Europe and Spanish Banks
3mth usd libor: 0.53625
no USD offers around in 3mths at all
Arbitrage level where we can sell our cheap jpy to get 3mth usd: 1.25 :eek:

26th May, markets not so spooked starting to calm down a bit
3mth usd libor: 0.53781
still no USD offers around in 3mths at all
Arbitrage level where we can sell our cheap jpy to get 3mth usd: 0.98

27th May, markets calming down a bit more
3mth usd libor: 0.53844
a fewUSD offers creeping back in 3mths
Arbitrage level where we can sell our cheap jpy to get 3mth usd: 0.85


imagine how expensive it can be for a lesser bank that can't get cheap funding elsewhere:eek:

thats just a brief explanation anyway
hope some of you find it useful :cool:

purch

how expensive it can be for a lesser bank

What can be "lesser" than a Japanese Bank :eek:

Generali

inspector_monkfish wrote: »

Let me explain an example of how fragile the market still can be,
and how way out of court LIBORs currently are, especially USD.

......

thats just a brief explanation anyway
hope some of you find it useful :cool:

So why the disconnect between LIBOR and the actual offer rate do you think? Are banks deliberately misrepresenting their funding costs? Is the panel used not representative? Is the whole idea of LIBOR in a credit contraction fundamentally self-contradictory?

inspector_monkfish

purch wrote: »

What can be "lesser" than a Japanese Bank :eek:

oh purchy boy, how times have changed since you left the markets !!

we have the yellow jersey these days....


anyway, ive given this post its own thread now, as thought it deserved it !!

inspector_monkfish

Generali wrote: »

So why the disconnect between LIBOR and the actual offer rate do you think? Are banks deliberately misrepresenting their funding costs? Is the panel used not representative? Is the whole idea of LIBOR in a credit contraction fundamentally self-contradictory?

absolutely mate
they are all far too low compared to real levels

purch

So why the disconnect between LIBOR and the actual offer rate do you think?

Basically IMO this highlights the disconnect between reality (the actual Cash markets) and the twilight world of the derivative market.

Interest Rate Futures are basically the 'original' derivative market, and the point where the Futures are FRA's etc etc began to set the actual rates, rather than the real cash markets was passed sometime in the early 90's.

The Forward FX market is driven by where the Futures are trading, not the actual cash market. When arbitrage trades are being done between Futures contracts in different currencies, it just goes to prove how disconnected from reality the markets became.

Using actual cash in a FX Forward trade to arb between 2 derivative futures contracts is bonkers, but has been commonplace for nearly 20 years.

The current credit contraction is just highlighting the ludicrous situation where LIBOR is totally disconnected from where real cash is tradeable.

lostinrates

Whatever you do next I'll read it. I understand it while I read it, but then it just drifts out again to be replaced by thoughts of a blonder nature.

tomterm8

Generali wrote: »

Are banks deliberately misrepresenting their funding costs?

Why would they? I can understand why Libor would misrepresent borrowing costs as being too high, but not why they would intentionally represent them as being lower than reality.

After all, banks have a lot of deals where the rate they can charge customers is linked to Libor, especially in the US.

lemonjelly

purch wrote: »

Basically IMO this highlights the disconnect between reality (the actual Cash markets) and the twilight world of the derivative market.

Interest Rate Futures are basically the 'original' derivative market, and the point where the Futures are FRA's etc etc began to set the actual rates, rather than the real cash markets was passed sometime in the early 90's.

The Forward FX market is driven by where the Futures are trading, not the actual cash market. When arbitrage trades are being done between Futures contracts in different currencies, it just goes to prove how disconnected from reality the markets became.

Using actual cash in a FX Forward trade to arb between 2 derivative futures contracts is bonkers, but has been commonplace for nearly 20 years.

The current credit contraction is just highlighting the ludicrous situation where LIBOR is totally disconnected from where real cash is tradeable.

purch types more than a witty half sentance without eek smiley shocker!:eek:;)

lemonjelly

lostinrates wrote: »

Whatever you do next I'll read it. I understand it while I read it, but then it just drifts out again to be replaced by thoughts of a blonder nature.

I'm with you (kinda) on this. It is fascinating stuff in a way. I kinda feel like I almost understand, but am still worried about opening my mouth for fear of proving that I really don't get it!:o

Still, like I said on another thread, it is very kind of numerous people to explain this kinda stuff!:)