by Alan Brace
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Product Description
Also known as the Libor market model, the Brace-Gatarek-Musiela (BGM) model is becoming an industry standard for pricing interest rate derivatives. Written by one of its developers, Engineering BGM builds progressively from simple to more sophisticated versions of the BGM model, offering a range of methods that can be programmed into production code to suit readers' requirements. After introducing the standard lognormal flat BGM model, the book focuses on the shifted/displaced diffusion version. Using this version, the author develops basic ideas about construction, change of measure, correlation, calibration, simulation, timeslicing, pricing, delta hedging, barriers, callable exotics (Bermudans), and vega hedging. Subsequent chapters address cross-economy BGM, the adaptation of the BGM model to inflation, a simple tractable stochastic volatility version of BGM, and Brazilian options suitable for BGM analysis. An appendix provides notation and an extensive array of formulae. The straightforward presentation of various BGM models in this handy book will help promote a robust, safe, and stable environment for calibrating, simulating, pricing, and hedging interest rate instruments.
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Average Customer Review:
0 of 1 people found the following review helpful:
 One of the best BGM books on the market, 2008-03-02
This is probably one of the best BGM books in the market. HJM and BGM models are studied in parallel. Shifted Lognormal distribution to model vol skew is very well explained.
0 of 2 people found the following review helpful:
 still a need for these methods, 2008-02-23
The financial instruments described by the book are quite powerful. So too is the level of maths needed to model them. The book is for a analyst or programmer, who is already well versed in financial simulations.
To be sure, there may be a diminution in the need for such instruments, in the near term. As the ongoing and massive losses in financial markets has been attributed in no small part to the (reckless?) use of some instruments like CDOs. But looking at the longer term, the ideas in the book are unlikely to entirely fade. There will still be a need for some practioners who understand its methods.
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