Chapter

LIBOR and Swap Market Models

Tomas Björk

in Arbitrage Theory in Continuous Time

Second edition

Published in print March 2004 | ISBN: 9780199271269
Published online October 2005 | e-ISBN: 9780191602849 | DOI: http://dx.doi.org/10.1093/0199271267.003.0025

Series: Oxford Finance Series

LIBOR and Swap Market Models

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A number of models have been successfully developed wherein the theoretical prices for caps, floors, and swaptions produced by the model are of the Black-76 form. In these models, discrete market rates are modelled like LIBOR rates in the LIBOR market models or forward swap rates in the swap market models; and under a suitable choice of numeraires, market rates can be modelled log normally. LIBOR caps and the market practice for pricing and quoting these instruments are discussed. It is shown that given a swap market model, the LIBOR rates will not be lognormal; thus, LIBOR market models and swap models are generally incompatible. Practice exercises are included.

Keywords: LIBOR models; swap market models; caps; floors; swaptions; pricing

Chapter.  9877 words. 

Subjects: Financial Markets

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