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. 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. Forward Rate

    A rate applicable to a financial transaction that will take place ...
  6. Black's Model

    A variation of the popular Black-Scholes options pricing model ...
Related Articles
  1. Options & Futures

    Breaking Down The Binomial Model To Value An Option

    Find out how to carve your way into this valuation model niche.
  2. Options & Futures

    Why Forward Contracts Are The Foundation Of All Derivatives

    This article expands on the complex structure of derivatives by explaining how an investor can assess interest rate parity and implement covered interest arbitrage by using a currency forward ...
  3. Investing Basics

    The Barnyard Basics Of Derivatives

    This tale of a fictional chicken farm is a great way to learn how derivatives work in the market.
  4. Investing News

    The LIBOR Scandal

    Barclays and other banks are alleged to have submitted artificially low LIBOR rates between 2007 and 2009.
  5. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  6. Active Trading Fundamentals

    Bet Smarter With The Monte Carlo Simulation

    This technique can reduce uncertainty in estimating future outcomes.
  7. Options & Futures

    Understanding Option Pricing

    Take advantage of stock movements by getting to know these derivatives.
  8. Options & Futures

    Multivariate Models: The Monte Carlo Analysis

    This decision-making tool integrates the idea that every decision has an impact on overall risk.
  9. Options & Futures

    An Introduction To LIBOR

    This influential rate is published daily in Britain, and felt all around the world.
  10. Fundamental Analysis

    5 Basic Financial Ratios And What They Reveal

    Understanding financial ratios can help investors pick strong stocks and build wealth. Here are five to know.
RELATED FAQS
  1. What is a Bermuda swaption?

    The Bermuda swaption refers to a modified American style of option. A swaption is an option on an interest rate swap in ... Read Full Answer >>
  2. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  3. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ... Read Full Answer >>
  4. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  5. How can I use a regression to see the correlation between prices and interest rates?

    In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
  6. How does implied volatility impact the pricing of options?

    Implied volatility is an important aspect of the time value premium of an option. As implied volatility increases, call and ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center