What Is the Brace Gatarek Musiela (BGM) Model?

The Brace Gatarek Musiela Model (BGM) is a nonlinear financial model that uses the London Interbank Offered Rate (LIBOR) to price interest rate derivatives. The Brace Gatarek Musiela (BGM) model prices securities by examining market-quoted rates. It is used most frequently when pricing swaptions ♑and caplets (a call on LIBOR) on the LIBOR market.

Understanding the Brace Gatarekജ Musiela (BGM) Model

Unlike the Hull-White model, which uses the instantaneous short rate, or the 澳洲幸运5开奖号码历史查询:Heath-Jarrow-Morton (HJM) model, which uses the instantaneous forward rate, the Brace Gatarek Musiel꧅a Model (BGM) model only uses rates that are observable: forward LIBOR rates. The BGM model is also consistent w🃏ith Black’s model, which is a variant of the widely used Black-Scholes derivative model.

Uses of BGM Model

The BGM model can determine a price for an investment if the payoff can be broken down into forward rates (yields), since forward rates apply to a spe🐼cific time frame and corr༒elate with other forward rates. Investors can run simulations using the various volatilities and correlations, and then determine the fair value by discounting coupons.

The London Interbank Offered Rate is the average of interest rates estimated by each of the leading banks in London that it would be cha𒐪rged were it to borrow from other banks. It is usuallyও abbreviated to Libor or LIBOR.