The 2nd edition of this successful book has several new features. The
calibration discussion of the basic LIBOR market model has been enriched
considerably, with an analysis of the impact of the swaptions
interpolation technique and of the exogenous instantaneous correlation
on the calibration outputs. A discussion of historical estimation of the
instantaneous correlation matrix and of rank reduction has been added,
and a LIBOR-model consistent swaption-volatility interpolation technique
has been introduced.
The old sections devoted to the smile issue in the LIBOR market model
have been enlarged into a new chapter. New sections on local-volatility
dynamics, and on stochastic volatility models have been added, with a
thorough treatment of the recently developed uncertain-volatility
approach.
Examples of calibrations to real market data are now considered.
The fast-growing interest for hybrid products has led to a new chapter.
A special focus here is devoted to the pricing of inflation-linked
derivatives.
The three final new chapters of this second edition are devoted to
credit.
Since Credit Derivatives are increasingly fundamental, and since in the
reduced-form modeling framework much of the technique involved is
analogous to interest-rate modeling, Credit Derivatives -- mostly Credit
Default Swaps (CDS), CDS Options and Constant Maturity CDS - are
discussed, building on the basic short rate-models and market models
introduced earlier for the default-free market. Counterparty risk in
interest rate payoff valuation is also considered, motivated by the
recent Basel II framework developments.