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I need to calculate a price of an autocap contract which is

An autocap is similar to a cap, but at most γ ≤ β caplets can be exercised, and they have to be automatically exercised when in the money

Payoff is enter image description here

This product heavily depends on correlation between libor rates. Therefore to incorporate this information into model, I decided to use cascade calibration approach described in Brigo and Mercurio book "Interest rate modeling" - I want to calibrate LMM to swaptions. The problem is that as I understand, only volatility of 1Y swappoints can be derived from Bloomberg. So I'm able to calibrate only 1Y forward rates dynamics. Then I'd like to use some interpolation approach to get from 1Y forward rates to 3m forward rate.

Is it a good idea?

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  • $\begingroup$ You can get much more breadth of swapping got data than that. And to calibrate correlation, you probably want some CMS spread options quotes too, though those are harder to find. $\endgroup$ – experquisite Nov 16 '14 at 0:42

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