SABR and SABR LIBOR Market Models in Practice - Crispoldi, Wigger, Larkin

Interest Rate vanilla traders have been using the SABR model to price vanilla products for more than a decade. Its biggest limitation, is the impossibility to value exotic products. A term structure model à la LMM is often employed to value these more complex derivatives. The LIBOR Market Model is however unable to capture the volatility smile. A joint SABR LIBOR Market Model is the natural evolution towards a consistent pricing of vanilla and exotic products. Knowledge of these models is essential to all aspiring interest rate quants, traders and risk managers, as well an understanding of their failings and alternatives.

This book is an accessible guide to interest rate modelling. Rather than covering an array of models which are not very often used in practice, it focuses on the SABR model, the market standard for vanilla products. It also covers the LIBOR Market Model, the most commonly used model for exotic products, as well as examining the extended SABR LIBOR Market Model. This book takes a hands-on approach, demonstrating simply how to implement and work with the models in practice. It bridges the gap between the understanding of the models from a conceptual and mathematical perspective and the actual implementation by supplementing the interest rate theory with working code. This is done by providing clear, interest rate modelling specific code examples written in Python.

"Today, a modern and flexible implementation of a term-structure interest rate model with smile capability is the backbone of most banks’ pricing frameworks. The present book gives a comprehensive treatment of LMM with stochastic volatility, including recent developments like multi-curve framework and inclusion of negative rates. At the same time, on top of the theoretical overhead, it manages to keep strong focus on applications and algorithms, providing an excellent starting point for more junior quants as well."

Holger Plank, Director, d-fine AG

"Crispoldi, Wigger and Larkin bring the SABR and SABR LIBOR Market Models to life with analysis of real data (Python code thoughtfully supplied) and description of how practice has evolved in the wake of the Global Financial Crisis."

Dr. Alet Roux, Senior Lecturer in Mathematical Finance, University of York, UK

"Everybody working with interest rate models should read 'SABR and SABR LIBOR Market Models in Practice'. The authors cover the essential material in a concise and ready to use way and clarify calibration and application of the models with Python code."

Prof. Dr. Rico von Wyss, Assistant Professor of Finance, University of St. Gallen