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Calibration of Multicurrency LIBOR Market Models

This paper presents a methodf or calibrating a multi currency lognormal LIBOR Market Model to market data of at-the-money caps, swaptions and FX options. By exploiting the fact that multivariate normal distributions are invariant under orthonormal transformations, the calibration problem is decomposed into manageable stages, while maintaining the ability to achieve realistic correlation structures between all modelled market variables.

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File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp286.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 286.

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Length: 26
Date of creation: 01 Dec 2010
Date of revision:
Handle: RePEc:uts:rpaper:286
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Web page: http://www.qfrc.uts.edu.au/

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  1. Miltersen, K. & K. Sandmann & D. Sondermann, 1994. "Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates," Discussion Paper Serie B 308, University of Bonn, Germany.
  2. Bruce Choy & Tim Dun & Erik Schlögl, 2003. "Correlating Market Models," Research Paper Series 105, Quantitative Finance Research Centre, University of Technology, Sydney.
  3. Erik Schlögl, 2001. "Arbitrage-Free Interpolation in Models of Market Observable Interest Rates," Research Paper Series 71, Quantitative Finance Research Centre, University of Technology, Sydney.
  4. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
  5. Farshid Jamshidian, 1997. "LIBOR and swap market models and measures (*)," Finance and Stochastics, Springer, vol. 1(4), pages 293-330.
  6. Erik Schlögl, 1999. "A Multicurrency Extension of the Lognormal Interest Rate Market Models," Research Paper Series 20, Quantitative Finance Research Centre, University of Technology, Sydney.
  7. Kay Pilz & Erik Schlogl, 2009. "A Hybrid Commodity and Interest Rate," Research Paper Series 261, Quantitative Finance Research Centre, University of Technology, Sydney.
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