Interest rate models

More about the book

The 2nd edition of this successful book features several enhancements. The calibration discussion of the basic LIBOR market model has been significantly expanded, analyzing the effects of the swaptions interpolation technique and exogenous instantaneous correlation on calibration outputs. It includes a historical estimation of the instantaneous correlation matrix and rank reduction, along with a LIBOR-model consistent swaption-volatility interpolation technique. The previous sections on the smile issue in the LIBOR market model have been transformed into a new chapter. Additional sections on local-volatility dynamics and stochastic volatility models have been incorporated, featuring a comprehensive treatment of the uncertain-volatility approach. Examples of calibrations to actual market data are now included. In response to the growing interest in hybrid products, a new chapter focuses on the pricing of inflation-linked derivatives. The final three chapters address credit, emphasizing the importance of Credit Derivatives, particularly Credit Default Swaps (CDS), CDS Options, and Constant Maturity CDS. These discussions build on the earlier introduced short rate-models and market models for the default-free market. Additionally, counterparty risk in interest rate payoff valuation is examined, reflecting recent developments in the Basel II framework.