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# Libor Question

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

1. ### rossmedia

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.

http://www.moneycafe.com/library/1mlibor.htm

Thanks.

R

R

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.

Jack

4. ### rossmedia

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?

R

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. ### rossmedia

That is what I thought, but I was not certain. Thank you much!

R

7. ### Thermactor

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%.

Jack

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