US Dollar Interest Rate Fixings in Offshore Currency Markets: The Puzzles of Volatility and Funding Cost

Abstract

Most international corporations raise funds in US dollars (USD). To price USD loans and debt instruments, the capital and money markets rely on interest-rate references (fixings) obtained in major financial centres. However, most of the reference rates come from USD interest rates in offshore currency markets, such as London, Singapore and Hong Kong. The first and most common interest-rate fixing is done in the London offshore market and called London Interbank Bank Offered Rate (LIBOR). Similar fixings are also then done in other offshore markets such as Singapore and Hong Kong. This chapter analyses the relationship between the choice of these benchmark references and the interestrate risks of corporate borrowers. Fixings are the interest rates reported by some banks. They do not necessarily represent the true and transactable rates of those banks contributing the quotes. Also, very few corporate borrowers ask which USD interest-rate fixings would be more beneficial. This chapter reveals that the USD interest-rate fixing in Hong Kong is the most unstable and the most unpredictable, as compared with those in London and Singapore. The LIBOR appears to be the best choice for corporate borrowings because it is consistently lower than the other two fixings.