Chapter 3: International Financial Markets

Practice tools, the world’s major financial centres, and interest-rate benchmarks (LIBOR → SOFR). Use this page for in-class discussion and homework review.

PPT: Add link Practice: FOREX.com demo News: DailyFX
Theme

What you should take away from Chapter 3

Financial centres Clusters of market activity: capital, talent, regulation, infrastructure, and reputation.
Benchmarks Why reference rates matter: pricing loans, swaps, floating-rate debt, and risk management.
Transition logic LIBOR relied on estimates; SOFR is transaction-based and secured.
In-class prompt
If a benchmark rate is widely used but not “verifiable” (based on estimates), what incentives arise for manipulation? What happens to systemic risk during stress?
Instructor note
If you post this on your course site, replace the “Add link” PPT placeholder and any “Game/Quiz” placeholders with your URLs.

Part I: International Financial Centres (GFCI)

The Global Financial Centres Index (GFCI) ranks financial centres using survey assessments and a large set of external “instrumental factors” grouped into: business environment, financial sector development, infrastructure, human capital, and reputation.

Latest Top 20 (GFCI 38 • published Sept 25, 2025)
Source: Z/Yen / Long Finance (GFCI 38)
Rank Centre Rating Prior rank Δ Rank Δ Rating
Interpretation tip
The top four centres in GFCI 38 are separated by only a few rating points—so small changes in inputs or sentiment can reshuffle leadership over time even if “rank” looks stable.
Discussion prompts
  • Why might New York and London remain durable leaders even when regulation and politics change?
  • How do time zones and “follow-the-sun” trading benefit a network of centres (NY–London–Asia)?
  • Why do some centres specialize (wealth management, fintech, commodities, shipping finance)?

Part II: Interest Rate Benchmarks — LIBOR vs SOFR

Plain-English analogies

  • LIBOR → like a “restaurant bill split” among banks (based on what they say/estimate).
  • SOFR → like a “grocery receipt” (based on actual transactions).

Key differences

Feature LIBOR SOFR
TypeEstimated / survey-basedTransaction-based
CollateralUnsecured (credit risk embedded)Secured (Treasury repo)
TenorsMultiple (O/N to 12M)Primarily overnight (term SOFR exists, but base is O/N)
Manipulation riskHigher (self-reported estimates)Lower (observable trades)
Primary USD use todayLegacy contracts onlyStandard reference for new USD floating-rate products

Timeline (high level)

  • 2008: Stress revealed weaknesses in unsecured interbank funding measures.
  • 2012: Investigations found LIBOR manipulation in multiple jurisdictions.
  • Jan 2022: LIBOR ended for most new USD lending (market transition phase).
  • Jun 30, 2023: Remaining USD LIBOR panel settings ceased (end of publication).
  • Now: SOFR is the core USD reference rate; contracts use SOFR + spread adjustments where needed.
Video placeholders (replace with your preferred links)
Why SOFR is considered more robust
It is derived from a large volume of overnight Treasury repo transactions and computed as a volume-weighted median, which reduces sensitivity to outliers compared with a simple average.

Calculators

1) Loan pricing: Benchmark + Spread
Total interest rate
2.50%
LIBOR + spread
2) SOFR “volume-weighted median” demo (teaching tool)

This is a classroom-friendly demonstration: enter repo trades (rate + volume). The calculator sorts by rate and finds the point where cumulative volume crosses 50% of total volume (the weighted median).

Important
This is a simplified teaching demo. Official SOFR production uses defined data sources/filters and publishes each business day.
Row Repo rate (%) Volume ($bn) Action
Weighted median result
—
Sorted by rate; median by cumulative volume

Homework — Chapter 3 Part I

  1. What does LIBOR stand for? How was it used in financial markets? Explain how it was calculated and why it was considered unreliable.
  2. LIBOR and the 2008 crisis: What role did benchmark stress and funding risk play? What was the LIBOR manipulation scandal?
  3. What is SOFR? How is it calculated? Why is it considered more reliable than LIBOR?
  4. Rate math: A loan used LIBOR + 2%. If LIBOR = 0.5%, what was the total interest rate?
  5. Rate math: A loan uses SOFR + 2%. If SOFR = 0.3%, what is the total interest rate?
Answer check (quick)
  • Q4: 2.5%
  • Q5: 2.3%

Quick Quiz (optional)

This is a low-stakes check for understanding. Your graded quizzes should remain in your LMS/jufinance system.

References (student-facing)