Interest rate market

For any given currency many different rates are regularly quoted.These include mortgage rates prime borrowing rates, deposit rates.Interest rate applicable on the credit risk situation.Higher the credit risk higher Interest rate .In this post we discuss about three rate which is important for option and future market .

Treasury rate-: Treasury rate applicable to borrowing by a government in its own currency  U.S.treasury  rates are the rates at which the U.S. government can borrow in U.S.dollar. Indian treasury rates are the rate at which  Indian government can borrow in Indian Rupee thats why their is no chance that government will default on an obligation denominated in its own currency.

LIBOR rate– Large international bank actively trade with each other.1 month 3 month,6 month and 12 month deposits denominated in all the world’s major currencies.If at particular time .Citi bank bid rate and offer rate to other banks for six month deposit  in australian dollar .The bid rate is known as the London Interbank Bid Rate(LIBID).The offer rate is known as the London Interbank offer rate or LIBOR.The rates are determined in trading between bank and change as economic condition change .If more bank borrow funds than lend funds.LIBID and LIBOR increases, If the reverse is true they decrease .LIBOR rates are generally higher than the corresponding treasury rates because they are not risk free rates.There is always a chance bank borrowing money will default large financial institution and banks tend to use the LIBOR rates rather than the treasury rate.The reason is that financial institution invest surplus fund in the LIBOR market and borrow to meet their short term funding requirement in the market.

Repo rate -Repurchase agreement(repo). This is a contract  where an investment dealer who owns securities are to sell them to another.Company now and buy them back later at slightly higher price.Difference between the price at which the securities are sold and the price at which they are repurchase is the interest earns. the loan involve very little credit risk.If the original owner of  the securities does not honor the agreement the lending company simply keeps the securities.If landing company does not keep to its side of agreement.The original owner of the securities keep the cash .Most common type repo is an overnight repo,longer term Repo called term repo.

Zero rates– Zero coupon rate of interest earned an investment that started today and lasts for n years all the investment and principal is realized at the end of n years.There are no intermediate  payments.The n year zero rates is sometimes also referred to as the n-year spot rates

Leave a Reply