Fast And Flexible Libor Model Pricing: Two-stage
Monte Carlo And On-the-fly Payoff Processing
Author(s)
M. Auer & S. Biffl
Abstract
The Libor market model is the standard interest rate model. Yet its application
relies on Monte Carlo simulation, which is slow, especially in a flexible,
product-independent model setup.
This paper proposes an alternative software design of the Monte Carlo
simulation to achieve fast and flexible pricing. The design is fast because it
separates the computation of forward rate paths from that of payoffs to avoid
redundant calculations; it is flexible because it adapts to new types of payoff
functions at run-time via on-the-fly compilation.
The approach is arbitrarily accurate—it supports a high discretization
resolution and even full factors without affecting the response time. It also
features a small-footprint software design that is cheap to maintain and productindependent.
Keywords: Libor market model, Monte Carlo simulation, derivative pricing, user
interface responsiveness.
1 Introduction
The Libor market model [1, 7] is the standard interest rate model. Its application
requires Monte Carlo simulation, and thus some sort of software implementation.
Ideally, this software should provide fast, accurate results, at low setup and
maintenance costs, and independent of product types. Yet these are conflicting
goals.
Consider a conventional software implementation of the Libor model, like a
Euler scheme applied to the logarithm of the forward rates. It provides arbitrarily
accurate results, and it is straightforward and cheap to set up and to maintain, but
it will have too slow a response time for traders who need quotes fast.
Keywords
Libor market model, Monte Carlo simulation, derivative pricing, user
interface responsiveness.
Related Book
Other papers in this volume
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