How do you show that being long a caplet and short a floorlet (both with strike K) is equivalent to a Forward Rate Agreement where you pay the fixed rate K?

  • $\begingroup$ is this not the call put parity? $\endgroup$ – Gordon Dec 15 '15 at 23:17

yes it is put-call parity:
long the caplet pays max(0; libor - K)
short the floorlet pays -max(0; K-libor)
add them up you always receive libor and pay K

| improve this answer | |

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.