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LIBOR Market Model
the approach
- Tree of LIBOR rates and bond prices recombines in two dimensions.
- The rates are conditional lognormal under the period-by-period risk neutral measure.
- The drift of the rates is controlled by varying the conditional probabilities on the tree.
- The binomial density of the tree can be varied to increase accuracy of the prices.
- The two-factor model is extendible to three or more factors.
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LMM and our new approach to the model. If you have any questions
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