Interest calculation using 6m LIBOR

[mcflurry]

Don't see why, as it's still an annualised rate?

[marky1]

Yes but it's often different to 3 month Libor. Maybe it provides more stability and easier hedging for the lender and that's why they use it. No idea what it is for, so just speculation on my part.

[Cheib]

mcflurry said:

Don't see why, as it's still an annualised rate?

Because it's higher than 3 month Libor if they are using it to calcualte interest on a loan.

It's basically a way of the bank making slightly more money....if you have a loan book where all the loans are calculated off 6 month libor and you fund with 3 month libor you can monetise the difference between the two. Sneaky........

[sidicks]

Cheib said:

Because it's higher than 3 month Libor if they are using it to calcualte interest on a loan.

It's basically a way of the bank making slightly more money....if you have a loan book where all the loans are calculated off 6 month libor and you fund with 3 month libor you can monetise the difference between the two. Sneaky........

But surely if you do that you're taking a risk at what level the 3m rate re-fixes at?!

It's not a sneaky margin, it's just taking a view on what might happen between the two rates?!

Sidicks

[Cheib]

sidicks said:

But surely if you do that you're taking a risk at what level the 3m rate re-fixes at?!

It's not a sneaky margin, it's just taking a view on what might happen between the two rates?!

Sidicks

It's pretty easy to hedge it (in a normal market...not the one we see today).

Also in a rate rising envirnonment (which is where this product could cost the bank money) 6 month Libor will be pricing in that expectation anyway.

In the professional market virtually every product is quoted against 3 month Libor....anything against 6 month Libor is very unusual indeed.

[sidicks]

Cheib said:

It's pretty easy to hedge it (in a normal market...not the one we see today).

Also in a rate rising envirnonment (which is where this product could cost the bank money) 6 month Libor will be pricing in that expectation anyway.

In the professional market virtually every product is quoted against 3 month Libor....anything against 6 month Libor is very unusual indeed.

Agreed but is 6m Libor pricing in the correct expectation?!

Sidicks

[Cheib]

sidicks said:

Cheib said:

It's pretty easy to hedge it (in a normal market...not the one we see today).

Also in a rate rising envirnonment (which is where this product could cost the bank money) 6 month Libor will be pricing in that expectation anyway.

In the professional market virtually every product is quoted against 3 month Libor....anything against 6 month Libor is very unusual indeed.

Agreed but is 6m Libor pricing in the correct expectation?!

Sidicks

True but it might not in a rate cutting environment too

Swings and roundabouts

[sidicks]

Cheib said:

True but it might not in a rate cutting environment too

Swings and roundabouts

Yes exactly - we have had 3mL/6mL basis trades on in the past, but it's an investment view, not a risk free arbitrage!

Sidicks