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 L🐠IBOR) on the LIBOR market.

Understanding the Brace G🏅atarek Musiela (BGM) Mo♔del

Unlike the Hull-White model, which uses the instantaneous short rate, or the 澳洲幸运5官方开奖结果体彩网:Heath-Jarrow-Morton (HJM) model, which uses the instantaneous forward rate, the Bra🏅ce Gatarek Musiela Model (BGM) model only uses rates that are observable: forward LIBOR rates. The BGM model is also consistent with 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 specific time frame and correlate 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 charged were it to borrow🍸 from other banks. It is usually abbreviated to Libor or LIBOR.