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Reference Rate


A rate that is used as a reference point for determination of payment in a contract/ agreement/ instrument, etc. A reference rate determines payment (payoff) by a party to another, where the parties have no control over the rate (and the way it is fixed or resets). For financial contracts, this rate is typically some form of an interest rate, but it can come in many different guises including an inflation rate, a consumer price index (CPI), a house price index or an unemployment rate.

For example, LIBOR used to provide an indication of the average rates at which contributing banks (LIBOR panel banks) could obtain wholesale, unsecured funding for specific periods denominated in a host of currencies.This rate was used by lenders to fix interest rates for a variety of interest-bearing instruments such as mortgages and commercial loans– and other types of financial products (e.g., derivatives: swaps, structured products, etc.)



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