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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?

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

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