The Euribor is a vital piece of information for the European banks. You can compare it to the LIBOR, the London Interbank Offered Rate, the amount of interest that London banks charge when lending to each other. Mortgage lenders and credit card companies track this rate, and set their own interest rates by reference to it, and typically higher. The Euribor is a much newer term, standing for the Euro Interbank Offered Rate, which is the interest rate that European banks offer to each other within the European Monetary Union zone, that is the countries that commonly use the euro.
It is a daily reference rate, which is founded on the average interest rates that the banks are charging each other for unsecured funds. The banks of most of the European monetary zone members take part in the Euribor. There is another bank rate used for overnight calculations, and this is called the Eonia (Euro Over Night Index Average).
National banks typically use the lending rate to stimulate or otherwise influence the economy in their country. Some banks do not take much part in this exercise, and others are constantly manipulating and finessing the rate, depending on the goals of the government. Certainly, a higher rate attracts foreign investment, if only for a “carry trade” where foreign exchange is made to the currency that offers the higher interest rate for a short term advantage.
The Euribor came into being in 1999, combining various European domestic rates, like the French PIBOR, and German FIBOR. It is different from the Euro LIBOR rates which are set in London. It is actually calculated from the different interest rates provided by the participating banks, which are processed by Reuters and then published each day. It is the average of the provided rates, after taking out the highest and lowest 15%. So what you are betting on is a futures style bet, actually every quarter, which reflects the consensus opinion of the participating banks.
You may be wondering how you can hope to spreadbet on what seems to be an amorphous idea of an interest rate. The answer to this is that you treat it like any other financial market, barring any particular news items that would affect it. Technical analysis teaches that we can, on average, anticipate market moves by looking at previous history, and this has been proven over the years. The market reveals the psychology of the participating traders in several ways, and technical analysis is an attempt to define and refine those ways. Barring any outside influence, you can reasonably expect to get a good idea of the direction of the market in future by seeing it how it has been traded in the past.
The best plan is to follow the movement of the Euribor rates for a few weeks, so that you can start to understand the amount that it moves, whether it moves more at a particular time of day, etc. Bear in mind that each day the Euribor is recalculated and issued on the Reuters website at around 11 AM, so you can see what effect this has on the rates. By testing out various indicators, you can see what seems to work the best on this particular financial instrument.
Spread Bet on the Euribor
When you spread bet on the Euribor, you are making an assessment of the direction of an interest rate which European banks use to borrow money from each other. The Euribor actually combines the rates from many European banks, as well as other financial interests that deal with Europe, and comes up with a consensus opinion. The current spread betting quote for the next quarter is 9907.5 – 9909.0. As with all interest rate bets, this represents the percentage rate subtracted from 100, in other words it is just over 99%, representing the interest rate as just under 1%.
If you think that the Euribor rate is going to go up, then you can place a long bet on this quote, for say £10 per point. Suppose that after a few weeks you have been proved correct and the rate goes up to 9929.2 – 9930.7, and you close your bet and calculate your winnings. This is how you can work them out: –
- Your long spread bet was placed at 9909.0
- Your spreadbet closed at 9929.2
- This means you have won 20.2 points
- Your bet was £10 per point
- The total you have won is 20.2 times £10
- Which is £202
If you were wrong and the rate went down, then you might want to close the bet when it had sunk to 9898.0 – 9899.5. Although this means that you take a loss, the most important thing is to close your bet before the loss becomes too large to bear. Here’s how much you lost: –
- Your long bet was placed at 9909.0, as before
- This time your bet closed at 9898.0
- That means you have lost 11.0 points
- With your stake of £10 per point, you lose £110.
As a second example, perhaps you believed in the first place that the rate would go down, and placed a short or sell bet at 9907.5 for £20 per point. Again, let’s assume in the first place that you have a winning bet, so the spread bet quote dropped to 9852.3 – 9853.8 and you closed the bet to collect your reward. This is how much you gained: –
- Your short spread bet was placed at 9907.5
- The spreadbet closed at 9853.8
- That means you gained is 9907.5-9853.8 points
- That is 53.7 points
- You bet £20 per point
- So you won £20 times 53.7
- You made £1074 total
Once again, no matter what you may want to believe, no one can win all the time, and you have to be prepared to take your losses quickly, before they become too large. Perhaps after placing your short bet the price went up to 9918.6 – 9920.1, and you closed the bet to prevent further damage. In this case: –
- Your spread betting position was placed at 9907.5
- This time it closed at 9920.1
- The difference between these is 12.6 points
- As it was a short bet and the price went up, this counts against you
- Your bet was for £20 per point
- This means you lost 12.6 times £20
- You lost a total of £252