Explanation:
LIBOR is the standard benchmark used to value floating interest rate swaps, particularly for interbank lending. As a junior trader at a German investment bank's Beijing office dealing with floating vs. floating interest rate swaps, LIBOR would be the most appropriate rate to use.
Choice B is incorrect. The Fed funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight. It's primarily used in the United States and wouldn't be the most likely choice for a trader in a German bank's Beijing office.
Choice C is incorrect. The Repo rate, or repurchase rate, is the rate at which central banks lend short-term money to commercial banks. While it does influence interest rates on loans and mortgages, it isn't typically used when valuing floating interest rate swaps.
Choice D is incorrect. Treasury rates are associated with U.S. government bonds and are not typically used for valuing floating vs floating interest swaps as they represent risk-free borrowing costs rather than interbank lending rates like LIBOR.
Q.646 Franky Johnson is a junior trader at the Beijing office of a large German investment bank. He is an Ivy League graduate and brings with him very little experience in derivatives trading. Today, he is instructed by his investment team to purchase the floating vs. floating interest rate swaps in the derivatives markets. Which of the following rates is he most likely to use to value a floating interest rate swap?
A
LIBOR.
B
Fed funds rate.
C
Repo rate.
D
Treasury rate.
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