2nd Edition

Interest Rate Modeling Theory and Practice, Second Edition

By Lixin Wu Copyright 2019
    518 Pages
    by CRC Press

    518 Pages 96 B/W Illustrations
    by CRC Press

    Containing many results that are new, or which exist only in recent research articles, Interest Rate Modeling: Theory and Practice, 2nd Edition portrays the theory of interest rate modeling as a three-dimensional object of finance, mathematics, and computation. It introduces all models with financial-economical justifications, develops options along the martingale approach, and handles option evaluations with precise numerical methods.


    • Presents a complete cycle of model construction and applications, showing readers how to build and use models

    • Provides a systematic treatment of intriguing industrial issues, such as volatility and correlation adjustments

    • Contains exercise sets and a number of examples, with many based on real market data

    • Includes comments on cutting-edge research, such as volatility-smile, positive interest-rate models, and convexity adjustment

    • New to the 2nd edition: volatility smile modeling; a new paradigm for inflation derivatives modeling; an extended market model for credit derivatives; a dual-curved model for the post-crisis interest-rate derivatives markets; and an elegant framework for the xVA.

    1. The Basics of Stochastic Calculus

    2. The Martingale Representation Theorem

    3. Interest Rates and Bonds

    4. The Heath-Jarrow-Morton Model

    5. Short-Rate Models and Lattice Implementation

    6. The LIBOR Market Model

    7. Calibration of LIBOR Market Model

    8. Volatility and Correlation Adjustments

    9. Affine Term Structure Models

    10. The Market Model for Inflation-Rate Derivatives.

    11. Levy Market Model

    12. Market Model for Inflation Derivatives Modeling

    13. Market Model for Credit Derivatives

    14. Dual-Curve Market Models for Post-Crisis Interest Rate Derivatives Markets

    15. xVA Definition, Evaluation and Risk Management 


    Lixin Wu is a professor at the Hong Kong University of Science and Technology. Best known in the financial engineering community for his work on market models, Dr. Wu co-developed the PDE model for soft barrier options and the finite-state Markov model for credit contagion.