In the wake of the Credit Crunch, there has been a structural shift in the behaviour of interest rate markets. Driven by credit and liquidity concerns in inter-bank lending, interest rate derivatives no longer trade according to standard text-book models. This has led market participates to revise their approach to the pricing and valuation of these fundamental instruments. Motivated by the same concerns, institutions are now also placing greater emphasis on the distinction between collateralised and uncollateralised contracts, with implications for all asset classes.

The talk will begin with a brief introduction to the topic. This will be followed by a discussion of how standard models are being generalised to account for the new market paradigm including curve construction, Black-Scholes and the Libor Market Model.

Michael Nealon is a Senior Quantitative Analyst at the National Australia Bank working within Market Risk. He has 7 years experience in quantitative finance with an emphasis on interest rate and credit derivatives.

Slides from the presentation.