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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