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While valuing Interest Rate Caps/Floors in Bloomberg, I saw that we have an option for selecting both Model and Volatility. So, my question is how exactly does Bloomberg value the cap/floor, when we use model as "Black Scholes Merton" and Volatility as "Normal". Is it that Bloomberg converts Normal vol to Lognormal vol (which might differ slightly from the listed Lognormal vols) and values it or do they use any extension/modified version of the Black Scholes model?

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So, my question is how exactly does Bloomberg value the cap/floor, when we use model as "Black Scholes Merton" and Volatility as "Normal".

Well, it doesn't. It will switch both fields either to Black-Scholes and Lognormal or to Normal and Normal. Just try it. Once you try to mix Normal with Black-Scholes and press Enter it will change it to one of the variants above. This answer already answered your question, what you are looking for is called Bachelier model.

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  • $\begingroup$ Thank you for the clarification. $\endgroup$
    – Ambat
    Commented Mar 13, 2023 at 10:06
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    $\begingroup$ @Ambat you may accept the answer if it was helpful. $\endgroup$
    – Hasek
    Commented Mar 13, 2023 at 17:01

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