Eurodollar or LIBOR cost of funds is a common phrase in banking, what does it mean or do though?
Banks borrow short term and lend out long term, they call it ‘maturity transformation’ and in doing so they aim to make a mark up on the money, it’s the same concept that a shop uses in selling cartons of milk, fundamentally the idea is the same.
The LIBOR rate is ‘London interbank offer rate’ and represents the cost of funds for a high quality non-governmental institutional borrower.
To get an idea of the cost of funds (and this is currently speculative because Irish banks don’t get offered funds at Euribor [euro equivalent of Libor]) all you have to do is a simple calculation.
We know that banks tend to use three month money and that means that any calculation will always have the interest rate reduced by multiplying it by 90/360 (3 months = 90 days, and 360 = 1 year [I know that in real life 1 year is 365 days but that small change of 5 days gives …