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**Interest rate models – theory and practice. With smile, inflation and credit.
2nd ed.**
*(English)*
Zbl 1109.91023

Springer Finance. Berlin: Springer (ISBN 3-540-22149-2/hbk). liv, 981 p. (2006).

This is a very detailed course on interest rate models. Its main goal is to construct some kind of bridge between theory and practice in this field. From one side, the authors would like to help quantitative analysts and advanced traders handle interest-rate derivatives with a sound theoretical apparatus. Also, they like to help academics to develop a feeling for the practical problems in the market. The book is structured in eight parts. The first part reviews basic concepts and definitions and briefly explains the fundamental theory of no-arbitrage in continuous time. In the second part the authors review some of the basic short-rate models and then hint on forward-rate ones, introducing the Heath-Jarrow-Morton framework. In the third one the “modern” models are introduced with description of their distributional properties, analytical tractability and numerical procedures for approximation of the interest-rate dynamics. The fourth part is entirely devoted to smile modeling and the fifth one deals with concrete applications. A series of market financial products is listed for which there is no uniquely consolidated pricing model. Inflation derivatives and related models are described in Part Six, and Part Seven concerns credit derivatives and counter-party risk. Part Eight contains five Appendices. Advanced undergraduate students, graduate students and researchers should benefit from reading this book and seeing how some sophisticated mathematics can be used in concrete financial problems. The first edition has been reviewed in [Zbl 1038.91040].

Reviewer: Yuliya S. Mishura (Kyïv)

### MSC:

91-02 | Research exposition (monographs, survey articles) pertaining to game theory, economics, and finance |

91G30 | Interest rates, asset pricing, etc. (stochastic models) |

91B24 | Microeconomic theory (price theory and economic markets) |