LIBOR Market Model

• Most multi-factor versions of the LMM use Monte-Carlo simulation to calculate the prices of interest-rate derivatives.
• The advantage of our recombining Markov model is that it produces a non-exploding state space.
• The model can price Bermudan-style swaptions off the tree of LIBOR rates and swap rates, whereas Monte-Carlo only provides bounds for the swaption prices.
• The model provides a fast, accurate pricing tool for complex derivatives.
• Most LMMs are 'Black boxes'. This model is implementable in EXCEL. All prices can be observed in the spreadsheet version of the model.