From practical application perspective, many interest rate smile models are complex and smile calibration processes are numerically intensive. This presentation will discuss a new type of interest rate smile model that can be made as efficient as the equivalent equity or FX smile model. By postulating a spot Libor process and using the numeraire-change technique, the Dupire-style local volatility stripping from market quotes (implied volatility smile) becomes possible in the asset class of interest rate. The model includes the formulation of a self-contained backward pricing PDE which can be used to price path-dependent interest rate derivatives with smile. This type of Libor smile model can also be an ideal candidate for incorporating interest rate volatility smile in hybrids.

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