Brace Gatarek Musiela Model - BGM

The Brace Gatarek Musiela Model has a few components, so we'll break it down a little at a time.

This one uses the LIBOR (London Interbank Offered Rate) rates. The LIBOR is the estimated standard interest rate that banks charge for loans (mainly loans given to other banks). LIBOR is based on five currencies (U.S. dollar (USD), euro (EUR), pound sterling (GBP), Japanese yen (JPY), and Swiss franc (CHF)), and seven total maturities: overnight, one week, and 1, 2, 3, 6, and 12 months.

As a refresher, maturity is when the share is full-term and able to be sold, and can collect all the interest due. The currencies and the maturities together means there are 35 different LIBOR rates each day. The Brace Gatarek Musiela Model (BGM) uses these forward (future) LIBOR rates to determine the payoff of an investment.

For instance, let's say you buy a share that matures in 6 months. Well, since LIBOR sets rates for various maturities, including 6 months...this model would reference back to that 6-month rate to determine what the value of that share will be.