The Libor Market Model is a financial model used to price and hedge exotic interest rate derivatives. The model is accepted and used widely due to its consistence with the standard market formula, Blacka??s cap (floor) formula. This compatibility simplifies the calibration because the Blacka??s quoted prices for standard interest rate derivatives can be directly used as an input for the model. The goal of this book is to examine the Libor Market Model theoretically and apply it practically to the pricing of standard caps, discrete barriers, European swaptions and ratchets. The dynamic of the Libor Market Model will be deAriAved and all steps of its implementation using Monte Carlo simulation will be explained. Implementation is fulfilled using different volatility and correlation structuring. Certain care should be taken when calibrating the Libor Market Model and structuring the forward rate volatilities and correlations as they may affect prices of interest rate derivatives...
