Robust Libor Modelling and Pricing of Derivative Products

Robust Libor Modelling and Pricing of Derivative Products

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One of's Best of 2005 - Top Ten Finance Books The Libor market model remains one of the most popular and advanced tools for modelling interest rates and interest rate derivatives, but finding a useful procedure for calibrating the model has been a perennial problem. Also the respective pricing of exotic derivative products such as Bermudan callable structures is considered highly non-trivial. In recent studies, author John Schoenmakers and his colleagues developed a fast and robust implied method for calibrating the Libor model and a new generic procedure for the pricing of callable derivative instruments in this model. Within a compact, self-contained review of the requisite mathematical theory on interest rate modelling, Robust Libor Modelling and Pricing of Derivative Products introduces the author's new approaches and their impact on Libor modelling and derivative pricing. Discussions include economically sensible parametrisations of the Libor market model, stability issues connected to direct least-squares calibration methods, European and Bermudan style exotics pricing, and lognormal approximations suitable for the Libor market model. A look at the available literature on Libor modelling shows that the issues surrounding instabilty of calibration and its consequences have not been well documented, and an effective general approach for treating Bermudan callable Libor products has been missing. This book fills these gaps and with clear illustrations, examples, and explanations, offers new methods that surmount some of the Libor model's thornier more

Product details

  • Hardback | 224 pages
  • 160 x 236.2 x 17.8mm | 385.56g
  • Taylor & Francis Inc
  • Chapman & Hall/CRC
  • Boca Raton, FL, United States
  • English
  • 12 black & white illustrations, 43 black & white tables
  • 158488441X
  • 9781584884415

Review quote

"Schoenmakers' text is the definitive text on the Libor market model (and related models). He briefly reviews financial engineering theory, explains the HJM framework, describes several Libor market model implementations, and illustrates with practical pricing problems. ... His writing is minimalist but extremely well organized. Ideas progress from one to another in a clear mathematical progressing of theorems and proofs. ... For serious implementers, Schoenmakers is the essential book. If you have the financial engineering background to follow it, you will find his presentation a delightful read - clean, rigorous and masterful." - Glyn Holton, Contingency Analysisshow more

Table of contents

ARBITRAGE-FREE MODELLING OF EFFECTIVE INTEREST RATES Elements of Arbitrage Theory and Derivative Pricing Modelling of Effective Forward Rates Pricing of Caps and Swaptions in Libor and Swap Market Models PARAMETRISATION OF THE LIBOR MARKET MODEL General Volatility Structures (Quasi) Time-Shift Homogeneous Models Parametrisation of Correlation Structures Some Possible Applications of Parametric Structures IMPLIED CALIBRATION OF A LIBOR MARKET MODEL TO CAPS AND SWAPTIONS Orientation and General Aspects Assessment of the Calibration Problem LSq Calibration and Stability Issues in Practice Regularisation via a Collateral Market Criterion Calibration of a Time-Shift Homogeneous LMM PRICING OF EXOTIC EUROPEAN STYLE PRODUCTS Exotic European Style Products Factor Dependence of Exotic Products Case Studies PRICING OF BERMUDAN STYLE LIBOR DERIVATIVES Orientation The Bermudan Pricing Problem Backward Construction of the Exercise Boundary Iterative Construction of the Optimal Stopping Time Duality; From Tight Lower Bounds to Tight Upper Bounds Monte Carlo Simulation of Upper Bounds Numerical Evaluation of Bermudan Swaptions by Different Methods Efficient Monte Carlo Construction of Upper Bounds Multiple Callable Structures PRICING LONG DATED PRODUCTS VIA LIBOR APPROXIMATIONS Introduction Different Lognormal Approximations Direct Simulation of Lognormal Approximations Efficiency Gain with Respect to SDE Simulation; an Optimal Simulation Program Practical Simulation Examples Summarisation and Final Remarks APPENDIX Glossary of Stochastic Calculus Minimum Search Procedures Additional Proofs REFERENCES INDEXshow more