Robust Libor Modelling and Pricing of Derivative Products: 1st Edition (Hardback) book cover

Robust Libor Modelling and Pricing of Derivative Products

1st Edition

By John Schoenmakers

Chapman and Hall/CRC

224 pages | 12 B/W Illus.

Purchasing Options:$ = USD
Hardback: 9781584884415
pub: 2005-03-29
Currently out of stock
x


FREE Standard Shipping!

Description

One of Riskbook.com'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 obstacles.

Reviews

"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 Analysis, 2005

"This book provides an introduction to the Libor market model, one of the current tools for modeling interest rates and interest rate derivatives."

-Short Book Reviews of the ISI

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

INDEX

About the Series

Chapman and Hall/CRC Financial Mathematics Series

Learn more…

Subject Categories

BISAC Subject Codes/Headings:
BUS027000
BUSINESS & ECONOMICS / Finance
MAT000000
MATHEMATICS / General
MAT029000
MATHEMATICS / Probability & Statistics / General