Libor Question

Discussion in 'Trading' started by rossmedia, May 1, 2008.

  1. Assume a strategy's gross return is designed to deduct the money would have earned if it was not invested and instead sat in a bank earning the current LIBOR monthly rate.

    Follow the link below (It's a chart of historical LIBOR) and tell me what would have been the return for an investment that earned 3% in Jan of 2001 after you deduct the monthly LIBOR.


  2. Is everyone asleep already?

  3. JackR


    Is this a trick question?

    5.622% Jan 01 LIBOR
    3.000% Stated Return after LIBOR Adjustment
    = 8.622% Gross return

    Gross return was 8.622% less the LIBOR if I read what you asked correctly.

  4. Jack,

    No it's not a trick question at all. A serious one actually. So are you saying that my return would actually be -2.622 if adjusted for LIBOR that month (which is what I meant in my first question, deduct libor from return to get my net).

    That means someone with 10mm cash could have earned over 5% in Jan 2001 or 500k+ just on a LIBOR rate alone.

    Is that correct? What am I missing?

  5. GTS


    The libor rate, like all interest rates are expressed in annual terms. You don't get 5% interest for one month - you get (5/12) =~ .42%
  6. That is what I thought, but I was not certain. Thank you much!

  7. That strategy for calculating return is also known as "risk premium", or the premium rate of return over the risk-free return.
  8. JackR


    OK - Your example really meant your actual return month over month was XXX %. You'd then adjust it for the annualized LIBOR rate so you'd lower the return by about .4%.