Interest Rate Models - Theory and Practice: With Smile, Inflation and Credit (Springer Finance)

The 2nd edition of this sucessful book has several new features. The calibration discussion of the basic LIBOR market model has been enriched considerably, with an analysis of the impact of the swaptions interpolation technique and of the exogenous instantaneous correlation on the calibration outputs. A discussion of historical estimation of the instantaneous correlation matrix and of rank reduction has been added, and a LIBOR-model consistent swaption-volatility interpolation technique has been introduced. The old sections devoted to the smile issue in the LIBOR market model have been enlarged into a new chapter. New sections on local-volatility dynamics, and on stochastic volatility models have been added, with a thorough treatment of the recently developed uncertain-volatility approach. Examples of calibrations to real market data are now considered. The fast-growing interest for hybrid products has led to a new chapter. A special focus here is devoted to the pricing of convertible bonds and inflation-linked derivatives. Since Credit Derivatives are increasingly fundamental, and since in the reduced-form modeling framework much of the technique involved is analogous to interest-rate modeling, Credit Derivatives -- mostly Credit Default Swaps (CDS) and CDS Options - are discussed, building on the basic short rate-models and market models introduced earlier for the default-free market. "The 2nd edition of this successful book has several new features. The calibration discussion of the basic LIBOR market model has been enriched considerably, with an analysis of the impact of the swaptions interpolation technique and of the exogenous instantaneous correlation on the calibration outputs. A discussion of historical estimation of the instantaneous correlation matrix and of rank reduction has been added, and a LIBOR-model consistent swaption-volatility interpolation technique has been introduced. The old sections devoted to the smile issue in the LIBOR market model have been enlarged into several new chapters. New sections on local-volatility dynamics, and on stochastic volatility models have been added, with a thorough treatment of the recently developed uncertain-volatility approach. Examples of calibrations to real market data are now considered. The fast-growing interest for hybrid products has led to new chapters. A special focus here is devoted to the pricing of inflation-linked derivatives. The three final new chapters of this second edition are devoted to credit. Since Credit Derivatives are increasingly fundamental, and since in the reduced-form modeling framework much of the technique involved is analogous to interest-rate modeling, Credit Derivatives -- mostly Credit Default Swaps (CDS), CDS Options and Constant Maturity CDS -- are discussed, building on the basic short rate-models and market models introduced earlier for the default-free market. Counterparty risk in interest rate payoff valuation is also considered, motivated by the recent Basel II framework developments."--Publisher's description

the 2nd Edition Of This Successful Book Has Several New Features. The Calibration Discussion Of The Basic Libor Market Model Has Been Enriched Considerably, With An Analysis Of The Impact Of The Swaptions Interpolation Technique And Of The Exogenous Instantaneous Correlation On The Calibration Outputs. A Discussion Of Historical Estimation Of The Instantaneous Correlation Matrix And Of Rank Reduction Has Been Added, And A Libor-model Consistent Swaption-volatility Interpolation Technique Has Been Introduced.

the Old Sections Devoted To The Smile Issue In The Libor Market Model Have Been Enlarged Into A New Chapter. New Sections On Local-volatility Dynamics, And On Shastic Volatility Models Have Been Added, With A Thorough Treatment Of The Recently Developed Uncertain-volatility Approach.
examples Of Calibrations To Real Market Data Are Now Considered.

the Fast-growing Interest For Hybrid Products Has Led To A New Chapter. A Special Focus Here Is Devoted To The Pricing Of Inflation-linked Derivatives.

the Three Final New Chapters Of This Second Edition Are Devoted To Credit.
since Credit Derivatives Are Increasingly Fundamental, And Since In The Reduced-form Modeling Framework Much Of The Technique Involved Is Analogous To Interest-rate Modeling, Credit Derivatives — Mostly Credit Default Swaps (cds), Cds Options And Constant Maturity Cds - Are Discussed, Building On The Basic Short Rate-models And Market Models Introduced Earlier For The Default-free Market. Counterparty Risk In Interest Rate Payoff Valuation Is Also Considered, Motivated By The Recent Basel Ii Framework Developments.

The 2nd edition of this successful book has several new features. The calibration discussion of the basic LIBOR market model has been enriched considerably, with an analysis of the impact of the swaptions interpolation technique and of the exogenous instantaneous correlation on the calibration outputs. A discussion of historical estimation of the instantaneous correlation matrix and of rank reduction has been added, and a LIBOR-model consistent swaption-volatility interpolation technique has been introduced. The old sections devoted to the smile issue in the LIBOR market model have been enlarged into a new chapter. New sections on local-volatility dynamics, and on stochastic volatility models have been added, with a thorough treatment of the recently developed uncertain-volatility approach. Examples of calibrations to real market data are now considered. The fast-growing interest for hybrid products has led to a new chapter. A special focus here is devoted to the pricing of inflation-linked derivatives. The three final new chapters of this second edition are devoted to credit. Since Credit Derivatives are increasingly fundamental, and since in the reduced-form modeling framework much of the technique involved is analogous to interest-rate modeling, Credit Derivatives -- mostly Credit Default Swaps (CDS), CDS Options and Constant Maturity CDS - are discussed, building on the basic short rate-models and market models introduced earlier for the default-free market. Counterparty risk in interest rate payoff valuation is also considered, motivated by the recent Basel II framework developments. This Book Explains How Interest-rate Models Work And Shows How To Implement Them For Concrete Pricing. The Revised 2nd Edition Of This Book Incorporates Considerable New Material, Including Sections On Local-volatility Dynamics, And On Stochastic Volatility Models. Pt. I. Models: Theory And Implementation. 1. Definitions And Notation. 2. No-arbitrage Pricing And Numeraire Change. 3. One-factor Short-rate Models. 4. Two-factor Short-rate Models. 5. The Heath-jarrow-morton (hjm) Framework. 6. The Libor And Swap Market Models (lfm And Lsm). 7. Cases Of Calibration Of The Libor Market Model. 8. Monte Carlo Tests For Lfm Analytical Approximations. 9. Other Interest-rate Models -- Pt. Ii. Pricing Derivatives In Practice. 10. Pricing Derivatives On A Single Interest-rate Curve. 11. Pricing Derivatives On Two Interest-rate Curves. 12. Pricing Equity Derivatives Under Stochastic Rates. App. A. Crash Introduction To Stochastic Differential Equations. Damiano Brigo, Fabio Mercurio. Includes Bibliographical References (p. [501]-508) And Index. In implementing mathematical models for pricing interest rate derivatives one has to address a number of practical issues such as the choice of a satisfactory model, the calibration to market data, the implementation of efficient routines, and so on. This book aims both at explaining rigorously how models work in theory and at suggesting how to implement them for concrete pricing. This is an area that is rarely covered by books on mathematical finance. The book is meant both to help quantitative analysts and advanced traders price and hedge with a sound theoretical apparatus, and to encourage academics to develop a feeling for the practical problems in the interest rate market that can be solved with the use of relatively advanced tools of mathematics and stochastic calculus in particular. Advanced undergraduate students, graduate students and researchers should benefit from seeing how mathematics can be used in concrete financial problems Contains a calibration discussion of the basic LIBOR market model, with an analysis of the impact of the swaptions interpolation technique and of the exogenous instantaneous correlation on the calibration outputs. This work also includes a discussion of historical estimation of the instantaneous correlation matrix and of rank reduction The concept of interest rate belongs to our every-day life and has entered our minds as something familiar we know how to deal with.