Brace Gatarek Musiela Model - BGM

Dictionary Says

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 Says

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.

comments powered by Disqus
Hot Definitions
  1. Chicago Mercantile Exchange - CME

    The world's second-largest exchange for futures and options on futures and the largest in the U.S. Trading involves mostly futures on interest rates, currency, equities, stock indices and agricultural products.
  2. Private Equity

    Equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity.
  3. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  4. Valuation

    The process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective.
  5. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
  6. Tech Street

    A term used in the financial markets and the press to refer to the technology sector. Companies like Intel, Microsoft, Apple and Dell are all considered to be part of Tech Street.
Trading Center