What is Libor's market model?
The Libor Tradition Model is a model of interest rates market. It predicts the behavior of interest rates based on certain assumptions that affect their movement. The model is often used for its price of financial derivatives, especially with the exchange of interest rates and the determination of a reinsurance strategy for investors holding them.
The exact origin of the model is unknown, but it was probably used several years before its formal publication in the economic article. He was published in three contributions in 1997: one Alan Brace, Dariusz Gatarek and Marek Musiela; one from Farshid Jamshidian; And one by Kristian Miltersen, Klaus Sandmann and Dieter Sondermann. The names of these authors inspired alternative names for the model. Sometimes it is called BGM or BGM/J model. However, the most common model name is the Libor or LMM.te market. Libor is the interest rate that banks offer each other for night loans that do not require collateral from the borrowing bank. This interest rate is a widely accepted reference rateThe values that serve as the basis for many interest swaps sold on the market.
Libor's model uses stochastic processes to predict Libor's rate movement. Other models predict short -term interest rates, but the Libor market provides a set of forward rates. All these rates are predictions of future Libor, so the accuracy of the model can be tested by comparing its predictions with the observed Libora on the market.
Having a set of forward interest rates allows investors to make various calculations to determine price and investment strategies. They can use handover rates to discount expected cash flows from derivatives so that they can decide more precisely what to pay for them. Expectations of interest rates also help them determine how to build their portfolios to protect against risk by a combination of derivatives.
libor is the basis for different derivatives, which means TrThe Libor harvest model can be used for the price of complicated derivatives that include interest swaps in their structures. Its use is the calculation of the prices of Bermudan exchanges, the possibility of closing the interest rate, which is complicated by its limitations in the data where the possibilities can be applied. The Libor market model is also helpful in determining prices for a number of other derivatives.