I am trying to price USD interest rate caps on 1M rates (e.g., LIBOR, SOFR, etc.).

The caps are designed to limit the exposure on non-callable USD Pay Float / Receive fixed positions in interest rate swaps. The swaps legal documentation states that the minimum float rate will alway be zero. If the USD float index (e.g., 1M SOFR) is -0.25, the float payment will be calculated at 0.00.

The strike rate on the caps is out-of-the money (e.g., 3%, 4%, 5%). And the maturities of the caps can extend as far as 30 years.

Should I use a NORMAL (Bachelier) or the standard LOGNORMAL (Black 76) for pricing the caplets?

Thanks in advance.



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