Interest rate models

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The 2nd edition of this successful book introduces several enhancements. The calibration discussion of the basic LIBOR market model has been significantly expanded, analyzing the effects of the swaptions interpolation technique and exogenous instantaneous correlation on calibration outputs. It includes a discussion on the historical estimation of the instantaneous correlation matrix and rank reduction, along with a new LIBOR-model consistent swaption-volatility interpolation technique. Sections addressing the smile issue in the LIBOR market model have been expanded into multiple new chapters. Additional sections cover local-volatility dynamics and stochastic volatility models, featuring a detailed exploration of the uncertain-volatility approach. Real market data calibration examples are now included. The growing interest in hybrid products has resulted in new chapters, particularly focusing on the pricing of inflation-linked derivatives. The final chapters address credit, as Credit Derivatives are increasingly vital; they discuss Credit Default Swaps (CDS), CDS Options, and Constant Maturity CDS, linking techniques to interest-rate modeling. Counterparty risk in interest rate payoff valuation is also examined, reflecting recent Basel II framework developments.