ABSTRACT
LIBOR IS AN ACRONYM for London Interbank Offer Rates. It is a set ofreference interest rates at which banks lend unsecured loans to other banks in the London wholesale money market. The so-called LIBOR market is largely an over-the-counter (OTC) market for loans and interest-rate derivatives of various currencies based on LIBOR; it crosses the geographical boundaries of countries and is outside the jurisdiction of the banking authority of any single government. Because of that, the LIBOR market has enjoyed a high degree of flexibility in financial innovations and has evolved rapidly over the years. Today, for almost all major currencies, the turnover of interest-rate derivatives in the LIBOR market has well surpassed that of each domestic market. In this chapter, we first describe the major instruments of the LIBOR market, before introducing the LIBOR market model, namely, the dominant model for LIBOR derivatives.
