What is Euro Interbank Offer Rate ?

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Euribor, or the Euro Interbank Offer Rate, is a reference rate that is constructed from the average interest rate at which eurozone banks offer unsecured short-term lending on the inter-bank market. The maturities on loans used to calculate Euribor often range from one week to one year.This is the benchmark rate with which banks lend or borrow excess reserves from one another over short periods of time, from one week to 12 months. These short-term loans are often structured as repurchase agreements (repos) and are intended to maintain bank liquidity and to make sure that excess cash is able to generate an interest return rather than sit idle.

Definition

The Euro Interbank Offered Rate (Euribor) is a benchmark interest rate composed of the average rates at which eurozone banks offer unsecured short-term loans in the interbank market. The loan terms used to calculate Euribor typically range from one week to one year.

Origin

Euribor was established on January 1, 1999, with the introduction of the euro, aiming to provide a unified benchmark interest rate for interbank lending in the eurozone. Its establishment was intended to promote integration and efficiency in the eurozone financial markets.

Categories and Features

Euribor includes multiple rates for different terms, ranging from one week to 12 months. Each term's rate reflects the cost of borrowing for banks over that specific period. A key feature of Euribor is its role as a benchmark for unsecured loans, widely used in pricing financial products such as mortgages, derivatives, and bonds.

Case Studies

Case Study 1: During the 2008 financial crisis, Euribor rates rose significantly, reflecting the credit crunch and market uncertainty among banks. Case Study 2: In 2020, during the COVID-19 pandemic, Euribor rates fell, reflecting the European Central Bank's accommodative monetary policy and increased market liquidity.

Common Issues

Investors often misunderstand Euribor as being fixed, but it actually fluctuates daily based on market conditions. Additionally, as an unsecured rate, Euribor may not be suitable for all types of loans and financial products.

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Law Of Supply

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