Brace Gatarek Musiela Model - BGM

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.

BREAKING DOWN '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. ICE LIBOR

    See LIBOR
  2. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
  3. Hull–White Model

    A single-factor interest model used to price derivatives. The ...
  4. Model Risk

    A type of risk that occurs when a financial model used to measure ...
  5. Black's Model

    A variation of the popular Black-Scholes options pricing model ...
  6. Stochastic Modeling

    A method of financial modeling in which one or more variables ...
Related Articles
  1. Markets

    The Importance Of LIBOR In Financial Markets

    What is LIBOR and why are its interest rates so important to the financial markets?
  2. Markets

    An Introduction To LIBOR

    This influential rate is published daily in Britain, and felt all around the world.
  3. Markets

    What Is ICE LIBOR And What Is It Used For?

    In the case of ICE LIBOR, an innocent-sounding set of letters has a profound bearing on every loan you make.
  4. Investing

    Why BBA LIBOR Was Replaced By ICE LIBOR

    We track the reason behind the change in LIBOR's prefix from BBA to ICE.
  5. Markets

    Two Alternatives for the U.S. LIBOR Benchmark Rate

    Working with the Fed, major Banks have identified two strong alternatives for U.S. credit market to replace LIBOR
  6. Markets

    What Is The Relationship Between The Federal Funds, Prime And LIBOR Rates?

    The prime rate and LIBOR rate, two of the most prominent benchmark rates, tend to track the federal funds rate closely over time. However, during periods of economic turmoil, LIBOR appears more ...
  7. Investing

    What is a Business Model?

    Business model is the term for a company’s plan as to how it will earn revenue.
  8. Investing

    Three Convicted in LIBOR Rigging Scandal

    A jury in London has found guilty three former Barclays traders of rigging the key overnight interest.
  9. Investing

    Calculating (Small) Company Credit Risk

    Determining creditworthiness of smaller and medium-sized corporations isn't as easy as for larger companies, but these tips can help.
  10. Investing

    Financial Models You Can Create With Excel

    The relatively modest amount of time it takes to build these models can pay for itself by leading you to better investment decisions.
RELATED FAQS
  1. Where on the internet can I find LIBOR rate information?

    Learn what the LIBOR is, which website provides general LIBOR information and which website provides ICE LIBOR data going ... Read Answer >>
  2. How can LIBOR be used as an economic indicator?

    Learn how the LIBOR is used, how it is calculated and how it can be used with Treasury bill rates to gauge the health of ... Read Answer >>
  3. How is Libor determined?

    Libor is the major rate used to price debt stock. Libor is actually a set of several benchmarks that reflect the average ... Read Answer >>
  4. How did LIBOR come into use?

    Learn about the significance of the London Interbank Offered Rate, or LIBOR, and the history of how the daily LIBOR became ... Read Answer >>
  5. How were bonds and derivatives manipulated in the LIBOR scandal of 2012?

    Discover what happened with the LIBOR scandal, uncovered in 2012, why it was important, and proposals to prevent it from ... Read Answer >>
  6. What is the average return on equity for a company in the electronics sector?

    Learn about the Black-Scholes option pricing model and the binomial options model, and understand the advantages of the binomial ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center