@INTEREST’ 4.0 is the latest edition of FEA’s software for pricing, hedging, & risk management in interest-rate markets. It adds a Brace, Gatarek, and Musiela (BGM) model for cap and swap option valuation to the product’s already broad option modeling functionality. FEA @INTEREST users can now choose from the BGM, as well as the Black ’76, Ho and Lee, Hull and White, Black and Karasinski, and Cox, Ingersoll, and Ross option pricing models. FEA @INTEREST software values cash and derivative instruments used in interest-rate markets. The BGM model in @INTEREST is a one-factor analytical model that values caps, forwards, and swap options. BGM models term rates rather than the ‘short’, or instantaneous, rate to represent the entire yield curve. BGM has two main advantages. The model is autocalibrating and pricing is highly consistent across instruments. The BGM model is calibrated using commonly available market data — volatilities for caps. Cap volatilities are input directly into the model. In contrast to models like Black ’76 in which volatility inputs vary from instrument to instrument, in the BGM model volatilities are consistent across instruments. Hedges, therefore, are equivalent.
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