SABR and SABR LIBOR Market Models in Practice

With Examples Implemented in Python
eBook
(216 Seiten)
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ISBN-13:
9781137378644
Einband:
eBook
Seiten:
216
Autor:
Christian Crispoldi
Serie:
Applied Quantitative Finance
eBook Typ:
PDF
eBook Format:
eBook
Kopierschutz:
Adobe DRM [Hard-DRM]
Sprache:
Englisch
Beschreibung:

Interest rate traders have been using the SABR model to price vanilla products for more than a decade. However this model suffers however from a severe limitation: its inability to value exotic products. A term structure model à la LIBOR Market Model (LMM) is often employed to value these more complex derivatives, however the LMM is unable to capture the volatility smile. A joint SABR LIBOR Market Model is the natural evolution towards a consistent pricing of vanilla and exotic products. Knowledge of these models is essential to all aspiring interest rate quants, traders and risk managers, as well an understanding of their failings and alternatives.
SABR and SABR Libor Market Models in Practice is an accessible guide to modern interest rate modelling. Rather than covering an array of models which are seldom used in practice, it focuses on the SABR model, the market standard for vanilla products, the LIBOR Market Model, the most commonly used model for exotic products and the extended SABR LIBOR Market Model. The book takes a hands-on approach, demonstrating simply how to implement and work with these models in a market setting. It bridges the gap between the understanding of the models from a conceptual and mathematical perspective and the actual implementation by supplementing the interest rate theory with modelling specific, practical code examples written in Python.
1. Introduction
1.1. Who Should Read This Book
1.2. Outline
1.3. Python, NumPy and SciPy

2. Interest Rate Derivatives Markets
2.1. Interest Rates
2.2. What You Need for Trading: ISDAs, Netting Agreement and CSAs
2.3. The Evolution of Complex Derivatives Trading
2.4. The Effects of the Financial Credit Crisis

3. Interest Rate Notions
3.1. Interest Rate Basics
3.2. The Multiple Curve Framework
3.3. Interest Rate Valuations and Measures
3.4. Volatility Trading
3.4.2. Swaptions

4. Vanilla Models
4.1. Lognormal Black Model
4.2. Normal Model
4.3. Risk Sensitivities
5. SABR Model
5.1. Introduction
5.2. SABR Parameters
5.3. PDE and Kolmogorov Equations
5.4. Hagan et al. Approximations
5.5. SABR Calibration in Practice
5.6. Risk Sensitivities
5.7. Monte Carlo Simulation Schemes for SABR
5.8. The Limits of Hagan et al. Approximations
5.9. Alternative SABR Approximations
5.10. Pricing in a Negative Forward Rate Regime: Shifted SABR Approximation


6. LIBOR Market Model
6.1. Introduction
6.1.1. Short Rate Models
6.2. Dynamics of the LIBOR Market Model
6.3. The Forward-Forward Correlation and Its Calibration
Nelson Siegel Approach
6.4. Volatility Parametrization and Calibration
6.5. Simulation
6.6. Risk Sensitivities


7. SABR LIBOR Market Model

7.1. Introduction
7.2. Dynamics of the SABR LIBOR Market Model
7.3. The Correlation Matrix and Its Calibration
7.4. Rebonato et al. SABR LMM Parametrization
7.5. Simulation and Pricing


A. Appendices
A.1. Time Grid and Day Count Conventions
A.2. A Note On Hyperbolic Geometry
A.3. LIBOR Market Model in the HJM Framework
A.4. Swap Market Model
Interest rate traders have been using the SABR model to price vanilla products for more than a decade. However this model suffers however from a severe limitation: its inability to value exotic products. A term structure model à la LIBOR Market Model (LMM) is often employed to value these more complex derivatives, however the LMM is unable to capture the volatility smile. A joint SABR LIBOR Market Model is the natural evolution towards a consistent pricing of vanilla and exotic products. Knowledge of these models is essential to all aspiring interest rate quants, traders and risk managers, as well an understanding of their failings and alternatives.

SABR and SABR Libor Market Models in Practice is an accessible guide to modern interest rate modelling. Rather than covering an array of models which are seldom used in practice, it focuses on the SABR model, the market standard for vanilla products, the LIBOR Market Model, the most commonly used model for exotic products and the extended SABR LIBOR Market Model. The book takes a hands-on approach, demonstrating simply how to implement and work with these models in a market setting. It bridges the gap between the understanding of the models from a conceptual and mathematical perspective and the actual implementation by supplementing the interest rate theory with modelling specific, practical code examples written in Python.

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