Arbitrage-free Dynamics in the LMM
Document ID: 2006-22 (previously 2006/019)
Published on: 1st October 2006
Author: Rutang Thanawalla
This notes derives the no-arbitrage dynamics for the Libor market model from first principles. Pricing under the LMM can be done under the forward or spot measure. Considerable attention is given to the drift term of the model since it helps explains the occasional high growth in forward Libor rates. The summary at the end of the document should be useful even for those not interested in the technical discussion.
