When implementing mathematical models for pricing interest rate
derivatives one must address a number of practical issues such as the
choice of a satisfactory model, the calibration to market data, the
implementation of efficient routines, and so on. This book explains how
models work and how to implement them for concrete pricing.
The 2nd edition of this successful book has several new features. The
calibration discussion of the basic LIBOR market model has been enriched
considerably, 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.
The fast-growing interest for hybrid products has led to a new chapter,
with a special focus devoted to the pricing of convertible bonds and
inflation-linked derivatives.