In 1992, Heath, Jarrow and Morton (HJM) published their famous approach to term structure modeling. Unlike most interest rate models up until then, this did not model just the short rate. It directly modeled an entire term structure of forward rates. This flexibility allowed for more sophisticated and consistent pricing of fixed income contingent claims, but it also posed significant modeling challenges. Actually, theirs was not so much a model as an approach to modeling. Somewhat of a cottage industry developed with researchers developing their own tractable implementations of the HJM methodology. A class of models were developed that were calibrated to cap implied volatilities. Collectively, these have been called the Libor market model. These could not simultaneously fit swaption implied volatilities, so a parallel model called the swap market model also emerged.

With this book, Rebonato introduces readers to these models. He describes the history and the workings of the HJM methodology. He explains how to implement this as a Libor or swap market model. he delves into his own approach to calibration and illustrates with pricing example.

Rebonato strives to make the material accessible to a large audience. He uses formulas, but he does so sparingly. You might see one or two formulas on a page in comparison to a more typical financial engineering txt that would have five or ten. Rebonato relies primarily on prose to explain technical concepts. I am not sure this was a good decision. Discussions go on for pages and pages where a couple formulas would have sufficed. Along the way, rigor is lost and the reader is left wondering what may have slipped through the cracks. Rebonato's approach does have the advantage of helping to put concepts in an understandable context