I have a cap volatility surface for the 6 months Libor.

Can I use the same cap volatility for every cap's caplet to valuate the full cap?

Example: Valuate a 18M cap (Libor 6M) by valuating 3 6M caplets using the same 180days 6M-Libor cap vol for the 3 caplets.


Yes, because by definition, a "cap volatility" is a volatility that when used for all caplets, gives the market price. However, if the caplets were priced independently, they would have different implied volatilities.

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  • $\begingroup$ I don't know much about this market but shouldn't one use the forward vol implied by the vol surface to price the forward starting caplets? $\endgroup$ – AlRacoon Feb 22 '18 at 14:10
  • $\begingroup$ I think that the implied volatilities to be used in caplets (if you don't want to use the constant cap vol) should be stripped from the cap volatility. I'm basing in this simple method: smileofthales.com/cap-floor-pricing-stripping-the-basics $\endgroup$ – Oliver Mohr Bonometti Feb 22 '18 at 14:12

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