Heath-Jarrow-Morton Model

The Heath-Jarrow-Morton (HJM) Model is a mathematical framework used in finance to describe the evolution of interest rates over time. It predicts future interest rates by modeling the entire yield curve—how different interest rates across various borrowing periods change simultaneously—based on current market data. This helps traders and risk managers assess the potential future movements of interest rates, enabling better pricing of interest-rate derivatives and managing financial risks. Essentially, it provides a comprehensive way to understand and forecast how interest rates might behave in the future, considering their interconnected dynamics.