Customer Reviews

The SABR/LIBOR Market Model: Pricing, Calibration and Hedging for Complex Interest-Rate Derivatives

5 star:		(0)
4 star:		(2)
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I am surprised this book only got 1 reiew after been published more than a year. I am a trader in rates vol, and have a MS degree in MFE. I have briefly read through the book especially the models and the hedging parts. I enjoyed the parts that described the impacts of the alpha/beta/rho/nu to the skew, and I liked the parts of hedging adjustments very much. To me, hedging is what it is all about. The author has hands on experience in trading desk thus the reading is very fun and smooth. Part of the book is very technical especially the implementation part. Otherwise the book is easy to understand and follow given that you have a MFE degree. I don't give 5 star to the book because I think given the current status of SABR, which is just a model that bank use to describe the skew, I am not sure how widely is this LIBOR-SABR model used by the banks out there. It is a nice mixture of stochastic vol into LMM, but the question is do the big boys really use them in their trading desk? To my experience when pricing exotic IR products there really is no "science", no model gives the "correct" price. All the desks just use whatever model they have and they find out their price is off compared to the market level, they will then tweak their model params a little bit until it matches the market price. Given this situation, what really matters now is not the price but the hedging the model outputs. Does LIBOR-SABR gives the best delta and vega hedging compared to a naive LMM model? I somewhat didn't find the answer from this book.

Having to deal with Exotic Interest Rates product professionally, I had to get the latest Rebonato's opum. I've found in the past that there is much to be annoyed with this author (he gets fairly deep into the details but not necessarily at the level where you can re-implement things yourself), but also very frequently insights you would not get anywhere else: in the case of this book, the couple of pages where he explains what makes a good model should be mandatory reading for any aspiring "quant" thinking about applying the tools of his trade to the dirty world of finance. This is much better stuff than the more common-place fare he served in his "plight of the fortune tellers". Recommended as such. If you're buying this for the specific model that Rebonato advocates, unless you're very deeply involved in Rates structured products, I don't think you're getting a bargain.