EURIBOR (Euro Interbank Offered Rate) is the average
interest rate at which euro-denominated unsecured loans are offered by a panel of banks in the European Economic Area (EEA). It is calculated daily by the European Money Markets Institute (EMMI) and is used as a reference rate for a wide range of financial products, including securitizations.
In securitizations, EURIBOR is often used as the
floating rate for the interest payments on the securities. This means that the interest payments on the securities will fluctuate with changes in EURIBOR. This can be a benefit for investors, as it allows them to benefit from rising interest rates. However, it can also be a risk, as it exposes investors to the possibility of falling interest rates.
Here are some of the pros and cons of using EURIBOR in securitisations:
Pros:
- EURIBOR is a widely used reference rate, which makes it easy to price
securitizations.
- EURIBOR is relatively stable, which makes it a good choice for investors who are looking for a predictable stream of income.
- EURIBOR is transparent, which means that investors can easily understand how it is calculated.
Cons:
- EURIBOR is not immune to changes in market conditions, which means that investors can still experience losses if interest rates rise or fall significantly.
- EURIBOR is not a perfect proxy for the cost of borrowing, which means that investors may not be getting the full benefit of rising interest rates.
Ultimately, the decision of whether or not to use EURIBOR in securitizations is a complex one that should be made on a case-by-case basis. It is important to weigh the pros and cons carefully before making a decision.