@ wkrynicki,Did you do the calculation with for instance caps and floors or differently?Is your graduate paper in Polish or in English 'cause I would be interested in the English version...

In my investigation of the possibilities to implement the swaption volatility smile I came across the paper of Gatarek;Libor market model with stochastic volatility.Does anyone have any experience with this type of models?Also Mercurio has some interesting papers about it.Thanks in advance.

Sure this helps, thanks Geist and RedAlert.

Anyone, any comment?

What is the link between cap volatility and swaption volatility?Is there a possibility to capture the swaption volatility smile based on the cap volatility smile?Is it correc that the first column of the swaption volatility matrix is basically a cap volatility matrix?Thanks for your help!!

Very rough overview:First determine the numeraire you want to use.Then determine the drift term (and the volatility, but in first instance you might want to use a determinstic volatility).Then generate the Brownian motion.Then you should be able to generate the paths for the forward rates.

Thanks,I've been looking around for Shreve's documents and that helps.

Based on a given numeraire I want to determine the drift of the forward rates in the LMM.Does anyone have a good reference for me?