Engineering BGM

Alan Brace

November 1, 2007 by Chapman and Hall/CRC
Reference - 240 Pages
ISBN 9781584889687 - CAT# C9683
Series: Chapman and Hall/CRC Financial Mathematics Series

USD$109.95

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Features

  • Describes many practical techniques and methods that address real-world requirements
  • Covers swaprate dynamics, the spot Libor measure, calibration techniques, Bermudans, pricing by simulation, timeslicers (lattices), and delta and vega hedging
  • Adapts the BJM model to inflation
  • Presents a shifted BGM model with a simple stochastic volatility extension, ideal for mortgage-backed securities and second-tier banks
  • Examines financial instruments in Brazil, which have evolved in a unique way and are amenable to BGM analysis
  • Summary

    Also known as the Libor market model, the Brace-Gatarek-Musiela (BGM) model is becoming an industry standard for pricing interest rate derivatives. Written by one of its developers, Engineering BGM builds progressively from simple to more sophisticated versions of the BGM model, offering a range of methods that can be programmed into production code to suit readers' requirements.

    After introducing the standard lognormal flat BGM model, the book focuses on the shifted/displaced diffusion version. Using this version, the author develops basic ideas about construction, change of measure, correlation, calibration, simulation, timeslicing, pricing, delta hedging, barriers, callable exotics (Bermudans), and vega hedging. Subsequent chapters address cross-economy BGM, the adaptation of the BGM model to inflation, a simple tractable stochastic volatility version of BGM, and Brazilian options suitable for BGM analysis. An appendix provides notation and an extensive array of formulae.

    The straightforward presentation of various BGM models in this handy book will help promote a robust, safe, and stable environment for calibrating, simulating, pricing, and hedging interest rate instruments.

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