A Practical Guide to Interest Rate Derivative Modelling

This wikibook is work in progress.

This book serves to be a practical guide of interest rate derivative modelling.

The target audience are students that have learned the basics of financial engineering from a textbook point of view. This book aims to connect the gap between textbook and practice. In particular, the book constantly makes an emphasis on what matters from an economic point of view from what matters as a technical or at implementation level.

As the book is for students, it tries to present the materials in a systematic, instructive manner, rather than in a handbook style. Also, the book dwells into the technical/implementation details, to the level where if the reader fully grasps the content they should be ready to work in interest rate derivative modelling in an investment bank (which they may or may not want :)

To provide the reader with some hands-on experience, we try to collect the relevant code libraries online in the open source community with which the reader can try out the concepts right away.

We will also make frequent references to the many excellent books / papers available out there to direct the reader for more in-depth reading in some topics.

Prerequisites
The primary prerequisite for the book is a curiosity in the subject!

That said, the reader is expected to have a basic level of prior textbook knowledge about interest rate products. We recommend the reader to browse through the book from Hull first, though our material is much easier than Hull's.

The mathematical requirement is fairly basic; high school math suffices for the bulk of the content. In a few technical details calculus is used, but it's ok to skip them unless you want to pick a job in the modelling field.

In this book we don't treat interest rate options and exotic products, for two reasons: (1) that topic is vast and complicated and the book will never finish, and (2) that topic doesn't fit very well with the core guideline of this book—model-freedom—which may seem a contradiction with the book title, but we'll see.

Contents

 * 1) /Fundamentals/
 * 2) /Single Currency Modelling/
 * 3) /Cross Currency Modelling/
 * 4) /Curve Calibration/