The next generation of RIO and RIO Function Library is now available. The most important news in version 4.3 is:
- LIBOR Market models
- Extended asset property specification in the FloatInfo table
- Improvements of the rw_Date function
- Increased precision in cap and swaption calculations
A LIBOR Market model is a multi-factor interest rate model used to price interest rate derivaties. In contrast to the 1-factor short-rate models already supported in RIO, the LIBOR Market model is based on the joint movement of multiple forward rates instead of the behaviour of a single short rate. The log-normal version of the Libor Market model has the advantage of pricing caps with Black's cap formula, which is market standard and therefore gives the model immediate appeal.
Furthermore extended versions of the log-normal LIBOR Market model are able the capture skew and smile effects which are often observed in the market, but not captured by traditional short-rate models. ScanRate supports a wide range of LIBOR Market models including CEV and stochastic volatility, along with various correlation specifications.
ScanRate has developed an unique interface for asset specification. The new interface enables the user to change even the slightest detail of the assets cashflow structure. This functionality will soon become an indispensable tool for the fixed-income analyst.
The Factsheet: LIBOR Market Models document contains a list of the many new posibilies RIO's LIBOR Market model setup accompanies.