what does the hjm model tell you 
a heath jarrow morton model is very theoretical and is used at the most advanced levels of financial analysis it is used mainly by arbitrageurs seeking arbitrage opportunities as well as analysts pricing derivatives the hjm model predicts forward interest rates with the starting point being the sum of what s known as drift terms and diffusion terms the forward rate drift is driven by volatility which is known as the hjm drift condition in the basic sense an hjm model is any interest rate model driven by a finite number of brownian motions the hjm model is based on the work of economists david heath robert jarrow and andrew morton in the 1980s the trio wrote a series of notable papers in the late 1980s and early 1990sthat laid the groundwork for the framework among them bond pricing and the term structure of interest rates a discrete time approximation contingent claims valuation with a random evolution of interest rates and bond pricing and the term structure of interest rates a new methodology for contingent claims valuation 1there are various additional models built on the hjm framework they all generally look to predict the entire forward rate curve not just the short rate or another point on the curve the biggest issue with hjm models is that they tend to have infinite dimensions making it almost impossible to compute there are various models that look to express the hjm model as a finite state hjm model and option pricingthe hjm model is also used in option pricing which refers to finding the fair value of a derivative contract trading institutions may use models to price options as a strategy for finding under or overvalued options option pricing models are mathematical models that use known inputs and predicted values such as implied volatility to find the theoretical value of options traders will use certain models to figure out the price at a certain point in time updating the value calculation based on changing risk for an hjm model to calculate the value of an interest rate swap the first step is to form a discount curve based on current option prices from that discount curve forward rates can be obtained from there the volatility of forwarding interest rates must be input and if the volatility is known the drift can be determined 