Brace Gatarek Musiela Model - BGM

AAA

DEFINITION of 'Brace Gatarek Musiela Model - BGM'

A nonlinear financial model that uses LIBOR rates to price interest rate derivatives. The Brace Gatarek Musiela (BGM) model prices securities by examining market-quoted rates. The BGM model is used most frequently when pricing swaptions and caplets (a call on LIBOR) on the LIBOR market.

Also known as the LIBOR market model.

INVESTOPEDIA EXPLAINS 'Brace Gatarek Musiela Model - BGM'

Unlike the Hull-White model, which uses the instantaneous short rate, or the Heath-Jarrow-Morton (HJM) model, which uses the instantaneous forward rate, the BGM model only uses rates that are observable: forward LIBOR rates. The BGM model is also consistent with Black’s model, which is a variant of the widely used Black-Scholes derivative model.

The BGM model can determine a price for an investment if the payoff can be broken down into forward rates (yields), since forward rates apply to a specific time frame and correlate with other forward rates. Investors can run simulations using the various volatilities and correlations, and then determine the fair value by discounting coupons.

RELATED TERMS
  1. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
  2. Cox-Ingersoll-Ross Model - CIR ...

    A mathematical formula used to model interest rate movements ...
  3. Interest-Rate Derivative

    A financial instrument based on an underlying financial security ...
  4. Vasicek Interest Rate Model

    A method of modeling interest rate movement that describes the ...
  5. Heath-Jarrow-Morton Model - HJM ...

    A model that applies forward rates to an existing term structure ...
  6. Black Scholes Model

    A model of price variation over time of financial instruments ...
Related Articles
  1. thinkstock|istock
    Options & Futures

    Breaking Down The Binomial Model To ...

  2. Forward contracts are traded amongst hedgers and traders in locations across the globe.
    Options & Futures

    Why Forward Contracts Are The Foundation ...

  3. Investing Basics

    The Barnyard Basics Of Derivatives

  4. Investing News

    The LIBOR Scandal

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
Trading Center