LIBOR Mortgages and Foreign Exchange

LIBOR stands for the London Inter Bank Offered Rate. This is the interest rate at which first class banks in London offer to lend currencies (especially in US dollars) to one another at a given instant. London is perhaps the premier international center for foreign exchange trading and the market in foreign exchange is a huge one. The market has a net daily turnover just in London of over $650
billion.

Many borrowers in the sub prime mortgage market in the US were unpleasantly surprised to discover that their adjustable rate mortgages were tied to the LIBOR rate rather than the US prime rate or discount rate. Since the LIBOR rate serves the forex (currency) markets the rate tends to frequently fluctuate and may be at times be considerably higher than the US prime rate. Some unfortunate homeowners discovered to their dismay that their ARMs were being reset at very high interest rates based upon LIBOR.

This failure to read the fine print in their mortgage agreements lead to a much higher than normal increase in home foreclosures as reset home mortgage payments were higher than the borrowers could afford to pay.

Forex market rates are determined by those who tend to have the best information and track-record. Incompetent market participants lose money and are soon eliminated. Markets are places to trade goods, and the same goes for Forex. The Forex market is a money market that never stops. The market for foreign exchange is by far the largest market in the world. The forex market is also the most important since exchange-rate shifts can affect all sorts of other asset prices, such as crude oil.

Spot foreign exchange offers better liquidity and generally a lower cost of trading than currency futures. Banks and brokers in spot foreign exchange can quote markets 24 hours a day. Spot forex, the abbreviation for foreign exchange, is the largest financial trading market in the world. It is based on the principle that as the supply and demand of a country’s currency fluctuates, the value of one currency relative to another will change and at times will change dramatically.

Forex trading forex brokers have access to pricing for more than 60 currency pair and excellent analytical services from renowned experts. They have access to up to the minute currency news bulletins and advanced forex charts. Forex is not a “market” in the traditional sense. It has no single center. There is no centralized location for trading activity as there is in currency futures. Rather the forex market is a worldwide electronic network of banks, forex brokers, corporations, hedge funds, investors large and small, and speculators.

In recent years the volume of transactions made over the Internet by smaller traders has increased dramatically but still is small compared to forex transactions made to expedite the exporting and importing of goods from one country to another.

Forwards are a part of the forex market and can be bought or sold versus the U.S. Dollar and other currencies. Forward exchange transactions provide importers and exporters with an opportunity to cover themselves against the risk of future changes in the spot exchange rate.

The US Dollar is still currently the most actively traded currency. Many currencies are still “pegged” to the U.S. Dollar for their exchange rate. The Dollar is used as the base currency. A lower rate for the US dollar means less of the corresponding currency is needed to buy one U.S.

London has emerged as the most active forex trading center in the world. Other important centers of activity are New York, Hong Kong, Frankfurt, Tokyo, Singapore, and in recent years Dubai. Again forex is not traded at physical exchanges at these locations but major banks that are part of the worldwide forex electronic network are located in these financially oriented cities and they are centers for experts in trading forex to live and to work.

One great advantage of trading forex in the Internet age is that a trader can access excellent trading services from any location in the world provided he has a fast Internet connection and local laws don’t prevent such activity. That means a country like Myanmar would be a poor choice to trade forex from.

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