The Heath–Jarrow–Morton Libor Model

Robert Jarrow () and Arkadev Chatterjea

Chapter 25 in An Introduction to Derivative Securities, Financial Markets, and Risk Management, 2024, pp 614-649 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The following sections are included:IntroductionWhy Caplets?A History of Caplet PricingBlack’s ModelThe Heath–Jarrow–Morton ModelThe HJM Libor ModelEXTENSION 25.1: Black’s Model for Pricing Commodity Options and CapletsThe AssumptionsPricing CapletsCaplet and Floorlet Pricing (CFP) DataCaplet Pricing ModelThe InputsObservable InputsThe Average Forward Rate VolatilityUnderstanding the HJM Libor ModelForward Rates and MartingalesRisk-Neutral ValuationActual versus Pseudo-probabilitiesCaps and FloorsCapsFloorletsCaplet–Floorlet ParityFloorsUsing the HJM Libor ModelThe GreeksDelta HedgingGamma HedgingAmerican Options, Futures, Swaptions, and Other DerivativesSummaryAppendixCasesQuestions and Problems

Keywords: Derivatives; Financial Markets; Risk Management; Arbitrage; Financial Engineering; Forwards; Futures; Call Options; Put Options; European Options; American Options; Swaps; Currency Swaps; Interest Rate Swaps; Commodity Swaps; Equity Swaps; Credit Default Swaps; Commodity Derivatives; Equity Derivatives; Index Derivatives; Interest Rate Derivatives; Commodities; Margins and Daily Settlements; Binomial Model; Black-Scholes Model; Black-Scholes-Merton Model; Delta Hedging; Gamma Hedging; Heath-Jarrow-Morton Model; Libor Model; Forward Rate Agreements; Interest Rate Futures; Interest Rate Options; Market Manipulation; Regulation; Derivatives Exchanges (search for similar items in EconPapers)
JEL-codes: C58 G1 G10 G13 G2 G20 G32 (search for similar items in EconPapers)
Date: 2024
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