Riccardo Rebonato,Kenneth McKay,Richard White's The SABR/LIBOR Market Model: Pricing, Calibration and PDF

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By Riccardo Rebonato,Kenneth McKay,Richard White

This booklet provides a huge innovation within the rate of interest area. It explains a financially prompted extension of the LIBOR marketplace version which literally reproduces the costs for simple vanilla hedging tools (swaptions and caplets) of all moves and maturities produced via the SABR version. The authors express easy methods to competently recuperate the complete of the SABR smile floor utilizing their extension of the LIBOR marketplace version. this isn't only a new version, this can be a new means of choice pricing that takes into consideration the necessity to calibrate as appropriately as attainable to the obvious vanilla reference hedging tools and the necessity to receive costs and hedges in average time while reproducing a practical destiny evolution of the smile floor. It eliminates the difficult selection among accuracy and time as the framework that the authors supply reproduces cutting-edge industry costs of simple vanilla concepts nearly precisely and at the same time provides an affordable destiny evolution for the smile surface.

The authors take the SABR version because the place to begin for his or her extension of the LMM since it is an effective version for eu techniques. the matter, in spite of the fact that with SABR is that it treats every one ecu choice in isolation and the tactics for a few of the underlyings (forward and switch premiums) don't check with one another so it's not seen find out how to relate those procedures into the dynamics of the full yield curve. With this new version, the authors deliver the dynamics of a number of the ahead charges and stochastic volatilities less than a unmarried umbrella. to make sure the absence of arbitrage they derive glide changes to be utilized to either the ahead charges and their volatilities. while this can be accomplished, complicated derivatives that depend upon the joint realisation of all suitable ahead premiums can now be priced.

Contents
THE THEORETICAL SET-UP
The Libor marketplace model
The SABR Model
The LMM-SABR Model

IMPLEMENTATION AND CALIBRATION
Calibrating the LMM-SABR version to industry Caplet prices
Calibrating the LMM/SABR version to industry Swaption Prices
Calibrating the Correlation Structure

EMPIRICAL EVIDENCE
The Empirical problem
Estimating the volatility of the ahead rates
Estimating the correlation structure
Estimating the volatility of the volatility

HEDGING
Hedging the Volatility Structure
Hedging the Correlation Structure
Hedging in stipulations of industry stress

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The SABR/LIBOR Market Model: Pricing, Calibration and Hedging for Complex Interest-Rate Derivatives by Riccardo Rebonato,Kenneth McKay,Richard White


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