Do you need to know what the Euribor rate is? You’re expanding your operations in Europe. Learning about the Euro, banking policies and stock markets in Europe is essential to making sure your business is successful. However, understanding the Euribor is just as crucial as well.

Euribor stands for Euro Interbank Offered Rate. This daily rate, which varies, consists of average interest rates where banks let other banks borrow money. These transactions take place in the interbank market. Thanks to online sources, you can find comprehensive information on the Euribor for beginners. Learn about the Euribor by doing the following:

1. Become familiar with the basics of the Euribor.

2. Learn how the Euribor rate works.

3. Understand why the Euribor is significant in Europe.

Action Steps
The best contacts and resources to help you get it done

Learn all about the basics of Euribor

Euribor plays an important role in the European banking policy. This is the benchmark rate that prime banks charge to lend money to other prime banks. There are two points you must remember about the Euribor. First, the EBF (European Banking Federation) and ACI (Financial Markets Association) sponsor this rate. EBF represents approximately 5,000 European banks. These banks have headquarters in several European countries, including Germany, Austria, France, Italy, and many others. Second, these banks must meet stiff market criteria in order to be part of this consortium.

I recommend: The European Banking Federation offers comprehensive Euribor for beginners information. You’ll learn about the strict rules banks must meet in order to be part of EBF. You'll also want to refer to the glossary at Reuters, which defines the Euribor rate.

Understand how the Euribor works

Now that you know what the Euribor is, your next step is to understand how it works. Every day, the major banks in Europe calculate the interest rates by averaging them. As a result, the Euribor rate varies on a daily basis. Reuters then sorts out the Euribor calculation and publishes this information.

I recommend: De Nederlandsche Bank has good information on how the Euribor works. You’ll learn how this interest rate is calculated. Rivaluta provides the technical details as to how banks contribute information regarding interest rates and how Reuters calculates the daily Euribor rate.

Learn why the Euribor is important in Europe

The Euribor rate plays a dominant role in Europe. It can affect other rates on other financial products, such as savings accounts, interest rate swaps, or interest rate futures. Bankers use the Euribor as the foundation for the world's active interest rate markets.

I recommend: Euribor-rates gives good information as to why the Euribor rate is significant in the European market. An editorial on the New York Stock Exchange site explains how the Euribor is one of the most important financial benchmarks in the world.

The Euro Interbank Offer Rate, known as Euribor for short, is the interest rate at which banks trading currency over the European money market will lend each other funds. Because it takes into account many of the most prominent banks in Europe, investors consider it the primary benchmark of the European money market. Although it's not as important to domestic businesses as, say, the London Interbank Offer Rate (Libor), it is very important to businesses who deal with countries using the euro.

The Euribor is sort of like the prime rate in the United States in that it sets a benchmark for loans, mortgages and other credit-based financial activities. However, because it accounts for such a diverse group of panel banks, it has a much wider impact on the international financial markets. In order to understand Euribor, consider the following facts:

1. Member countries of the European Union came together to develop Euribor in 1999 in response to the introduction of the euro.

2. Euribor is calculated from the interest rates of panel banks in Europe, Japan and the United States.

3. Data from Euribor can be used to strategically invest in certain derivatives like currency futures and options.

Action Steps
The best contacts and resources to help you get it done

Get familiar with the Euribor panel banks

In order to understand Euribor and its affect on the international markets, it's helpful to know what banks' interest rates go into its calculation. Most of the panel banks are located in the European Union; Germany has 10 panel banks, the most of any member country, and is closely followed by France, who has 6. Other major participating countries are Spain, Italy, Luxembourg and the Netherlands. It's important to remember, though, that neither the United Kingdom nor Switzerland participate, because they don't use the euro.

I recommend: The European Banking Federation maintains an up-to-date list of the current panel banks. It's also helpful to keep up with the Euro-Dollar exchange rate, which you can find at Yahoo! Finance.

Learn how Euribor is calculated

Reuters uses a simple Euribor formula to combine the interest rates offered by panel banks into a single value. Each day it gathers data from each of the panel banks, removes the top and bottom 15 percent of the rates and then averages the remaining figures together. The resulting number is the Euribor.

I recommend: You can find the latest Euribor figures and compare them to the prime rate, Libor and other monetary rates on The Wall Street Journal website. You can also track historical trends in the Euribor on its website. To see Euribor data displayed in graphs, head to Euribor-Rates.eu.

Use Euribor to hedge risk by investing in futures contracts and swaps

Because Reuters publishes Euribor information for periods of time ranging from 1 week up to 1 year, you can use it to invest in currency futures, which protects your assets against unexpected fluctuations in the exchange rate. Businesses and banks also use Euribor as a basis for other derivative instruments, such as interest rate swaps and forward rate agreements.

I recommend: NYSE Euronext provides a basic introduction to Euribor and its relation to financial derivatives like futures contracts and options. Investopedia has also published a helpful article for beginning investors in Forex futures. When you're ready to invest, sign up for an account at GAIN Capital Group's Forex.com.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Investors and financial advisors who specialize in currency trading and the foreign exchange market can be good sources of Euribor help and Euribor advice.

The Euribor, or Euro Inter-Bank Offer Rate, is the average daily interest rate at which certain banks in Europe lend each other money. Because these banks are some of the biggest ones in Europe, the Euribor functions as a benchmark for short-term interest rates within the European Union. The rate also has an impact on foreign exchange rates and the world economy in general. After calculating the rate each day, Reuters publishes it.

Action Steps
The best contacts and resources to help you get it done

Eonia

An acronym for the Euro OverNight Index Average, the Eonia is the overnight version of the Euribor. The European Central Bank calculates the rate each day. In principle, the rate is similar to the federal funds rate in the United States.

I recommend: See Investopedia ULC for a brief explanation of the Eonia and other Euribor key terms.

Interest rate swaps

Interest rate swaps are a kind of derivative financial instrument that allow investors to trade cash flows based on underlying interest rates. As a benchmark for short-term rates, investors use the Euribor as a basis for floating-rate swaps.

I recommend: Check out the short guide on interest rate swaps from Contingency Analysis.

TARGET

Short for the Trans-European Automated Real-time Gross settlement Express Transfer system, TARGET is the main payment system behind interbank transactions in Europe.

I recommend: Visit the European Central Bank's online glossary to learn more about the TARGET system.

TARGET holidays

In addition to weekends, the TARGET system closes on several major holidays, including Christmas, New Year's Day and May Day. The closings are similar to those of banks in the United States on federal holidays.

I recommend: Euribor FBE has a full list of the TARGET Holidays.

Panel banks

Not every bank in Europe contributes to the Euribor average. Instead, only the biggest and most influential banks qualify for consideration. Although most of these panel banks are European, a very small number are from other countries. An example of a panel bank in the United States is Citibank.

I recommend: The Euribor website has a list of all the participating Panel Banks organized by country.

Interbank market

The interbank market is where banks buy and sell foreign currency. Unlike the stock market, which brokers run from several physical locations like Wall Street, the interbank market is entirely virtual, formed from thousands of banks connected by an electronic network.

I recommend: Forex Trading provides a short but helpful explanation of the interbank market and the foreign exchange.

Before you begin working with Euribor, it's important to understand its role in the financial markets. Euribor, the Euro Interbank Offer Rate, reflects the cost of unsecured lending between banks to borrow on the Eurodollar. It is similar to the Prime Rate in the US and the Libor rate of Great Britain. Although the prime Prime Rate and Libor rate represent the secured lending between banks, EURIBOR is the official rate for the Banking Federation of the EU.

The Euribor rate is used as the basis for mortgages made in "high risk" areas, for example, Spain, and affects European money markets and interest rates which influence the costs of mortgages and other consumer lending products as well as the Forex markets.

1. Euribor interest rates affect the interest rates for loans to businesses and individuals in Europe.

2. Euribor rates are lower than Libor rates but more risky.

3. Euribor is based on one-month, three-month and twelve-month demarcations.

Action Steps
The best contacts and resources to help you get it done

Understand the connection between Euribor and the European Banking Federation

The European Banking Federation (EBF) is not quite a lobby for banking but it is a consortium of over 5,000 banks from 31 countries that is allied in its dialogue concerning banking policies in member countries and around the world. The EBF banks use the Euribor to determine the interest rate used for lending among each other.

I recommend: If you're doing business with any of the EBF countries and banks they will base their loans on Euribor, which is usually lower than the interest rates for LIBOR and the Prime Rate. Use the Euribor website for in-depth information on its role in world-wide financial applications.

Follow Euribor interest rates for investing purposes

Investing in futures contracts and swaps with any of the member organizations of the EBF requires that you use Euribor interest rates for calculating hedges.

I recommend: You can follow all the money rates, including Euribor, used in world finance and compare them using the Wall Street Journal market data center--see Euro Zone in this case. Historical information on Euribor rates are necessary for investing in swaps and derivatives.

Keep abreast of the Euribor role in world-wide finance

Even the best investors can learn from experts in the world-wide finance arena. The more information you have and the more commentary you read can help prevent you from making unwise investing decisions.

I recommend: ACI The Financial Markets Association is a global market of financial professionals. Its information and analysis on foreign exchange swaps and derivatives, which include the influence of Euribor rates, can give you a lead on where interest rates are going. FXStreet.com is a great resource for Euribor commentary that will help you invest wisely during volatile times.