Containing many results that are new, or which exist only in recent research articles, Interest Rate Modeling: Theory and Practice, 2nd Edition portrays the theory of interest rate modeling as a three-dimensional object of finance, mathematics, and computation. It introduces all models with financial-economical justifications, develops options along the martingale approach, and handles option evaluations with precise numerical methods.


  • Presents a complete cycle of model construction and applications, showing readers how to build and use models
  • Provides a systematic treatment of intriguing industrial issues, such as volatility and correlation adjustments
  • Contains exercise sets and a number of examples, with many based on real market data
  • Includes comments on cutting-edge research, such as volatility-smile, positive interest-rate models, and convexity adjustment
  • New to the 2nd edition: volatility smile modeling; a new paradigm for inflation derivatives modeling; an extended market model for credit derivatives; a dual-curved model for the post-crisis interest-rate derivatives markets; and an elegant framework for the xVA.

chapter Chapter 1|22 pages

The Basics of Stochastic Calculus

chapter Chapter 2|28 pages

The Martingale Representation Theorem

chapter Chapter 3|17 pages

Interest Rates and Bonds

chapter Chapter 4|47 pages

The Heath–Jarrow–Morton Model

chapter Chapter 5|30 pages

Short-Rate Models and Lattice Implementation

chapter Chapter 6|39 pages

The LIBOR Market Model

chapter Chapter 7|36 pages

Calibration of LIBOR Market Model

chapter Chapter 8|27 pages

Volatility and Correlation Adjustments

chapter Chapter 9|27 pages

Affine Term Structure Models

chapter Chapter 10|33 pages

Market Models with Stochastic Volatilities

chapter Chapter 11|28 pages

Lévy Market Model

chapter Chapter 12|20 pages

Market Model for Inflation Derivatives Modeling

chapter Chapter 13|29 pages

Market Model for Credit Derivatives

chapter Chapter 15|23 pages

xVA: Definition, Evaluation and Risk Management