Abstract: We propose a two-currency version of our previous LIBOR Market (LM) model. In this model the LIBOR rates in each currency are log-normal martingales under their respective currency forward measures induced by using the discount bond prices in the respective currencies as numeraires. The forward exchange rate is also a log-normal martingale under the forward measure of the home currency. In this two-currency model we develop closed-form pricing formulae for a range of cross-currency term structure derivatives.

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