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1 vote

How does Bloomberg calculate Interest Rate Caps/Floors with Black Scholes Merton Model and Volatility set as "Normal"?

So, my question is how exactly does Bloomberg value the cap/floor, when we use model as "Black Scholes Merton" and Volatility as "Normal". Well, it doesn't. It will switch both ...
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2 votes

Is there a way to use normal volatility in the Black–Scholes–Merton model to value interest rate caps?

This has actually been done widely in the industry since negative interest rates became a long-term feature of financial markets (JPY, EUR, CHF). When your underlying is a Gaussian martingale, ...
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