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.


1 Answer 1


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.

  • $\begingroup$ 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, 2018 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 $\endgroup$ Feb 22, 2018 at 14:12
  • $\begingroup$ Hi - I would say you both are right at the same time: as the answer of @dm63 suggests, both can give you the "correct" (same) cap price -- (a) either using a flat cap vol for all caplets, or (b) using a caplet-specific (forward) vol for each individual caplet. The three components of your 18M cap will have differing individual Black/Bachelier prices but their sum, however, will be equal (because that's how you found your forward caplet vols in the first place - the so-called stripping you and the link describe) $\endgroup$
    – KevinT
    May 16, 2022 at 9:29

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