9
votes
Accepted
Caplet "in arrears" pricing formula
Let $P(t, T)$ be the price at time $t$ of a zero-coupon bond with maturity $T$ and unit face value. Consider the pricing of the caplet with payoff $(L(t_1; t_1, t_2)-K)^+$ at time $t_1$, where $0<...
- 21.2k
5
votes
Accepted
How to understand wedge?
A ‘wedge’ as understood by interest rate options traders is a structure of the form : long a cap/floor straddle struck ATM for a period of 1 yr starting in N years / short a N year into 1 year ...
- 17.5k
4
votes
Accepted
Forward starting zero-coupon bonds
$Z(t_0,t_1,t_2)$ is the $t_1$-forward price of the ZC bond with maturity $t_2$, as of $t_0$. We have:
$$ Z(t_0,t_1,t_2) = E_{t_0}^{t_1}[Z(t_1,t_2)]\not= Z(t_1,t_2).$$
With a not-trivially stochastic ...
- 5,123
4
votes
Where can I find caplet implied volatility data?
VCUB will not show caplet vol but shows cap vol (as one of the inputs). Caplets are a sequential series of interest rate options (that together form the cap). You ...
- 9,394
3
votes
How to understand wedge?
I have never seen the wedge term in the literature, where do you get it from?
Caps and floors are indeed insensitive to correlation, since they are baskets of options (caplets/floorlets), but this is ...
- 2,680
3
votes
Accepted
Show that the price of a LIBOR rate paid in advance is a linear combination of caplets
Assume that the payoff is $L(T1,T1,T2)=:X$ paid at $T_1$.
This is equivalent to paying off $X(1+X)$ at time $T_2$.
You can do this because in the risk neutral setting, a certain payment known at ...
- 2,521
3
votes
Caplet "in arrears" pricing formula
Case I
Let us consider a derivative with a payoff $H(L(T_{f},T_{S},T_{E}))$ which is paid at time $T_{p}$.
Note that:
$T_{f}$ - LIBOR fixing date;
$T_{S}$ - LIBOR start date;
$T_{E}$ - LIBOR maturity ...
- 83
2
votes
What is the correct implied volatility to use when valuing an FRA option?
I think it is necessary to be more precise on the terminology here, so my answer will be a bit longer.
Firstly, we need to distinguish the FRA, the FRA option and the caplet/floorlet. A FRA basically ...
- 645
2
votes
Where can I find caplet implied volatility data?
If you have a Bloomberg terminal, you can lookup vols for different currencies and indexes with the VCUB function, where you can check the raw market input data and ...
- 5,845
1
vote
QuantLib Python: How to print each caplet/floorlet value, intrinsic value and time value at each fixing date?
The CapFloor class provides some limited information (see the SWIG wrappers). You can call capfloor.optionletsPrice() to get a ...
- 7,853
1
vote
Caplet delta hedging
First, let me give you some answers based on my intuition on how to hedge that sort of position. Hopefully, they'll help a bit.
When delta hedging a call on a stock, you take the necessary amount of ...
- 853
1
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What is the correct volatility to use for inverting Black76?
This depends on the currency you're looking at really. If you are pricing a cap/floor on for example EUR or CHF, then using Black is not particularly useful. The reason is because you have both ...
- 1,906
1
vote
Accepted
Quantlib error initializing CapFloor C++ Class
Never mind, just found out the issue.
The IborLeg class has a method called "withNotionals(Real)" used to set the notional value.
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